NEITHER CANADIAN SECURITIES COMMISSIONS NOR THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSIONS HAVE APPROVED OR
DISAPPROVED OF THE PROPOSED ARRANGEMENT INVOLVING HEMOSOL INC., ITS
SECURITYHOLDERS AND MDS INC., OR PASSED UPON THE MERITS OR FAIRNESS OF THE
ARRANGEMENT OR UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN
THIS NOTICE OF ANNUAL AND SPECIAL MEETING AND MANAGEMENT INFORMATION CIRCULAR.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE.
(HEMOSOL LOGO)
ARRANGEMENT INVOLVING
HEMOSOL INC.,
ITS SECURITYHOLDERS
AND
MDS INC.
ANNUAL AND SPECIAL MEETING
OF SECURITYHOLDERS OF HEMOSOL INC.
TO BE HELD ON APRIL 20, 2004
NOTICE OF ANNUAL AND SPECIAL MEETING
AND
MANAGEMENT INFORMATION CIRCULAR
March 10, 2004
It may be difficult for shareholders of Hemosol Inc. who are resident in the
United States to enforce their rights and any claim they may have arising under
the United States federal securities laws, since Hemosol Inc. and MDS Inc. are
incorporated and organized under the laws of Canada, and some of their
respective officers and directors are residents of Canada. Shareholders of
Hemosol Inc. who are resident in the United States may not be able to sue a
Canadian company or its officers or directors in a Canadian court for violations
of the United States securities laws. It may be difficult to compel a Canadian
company and its affiliates to subject themselves to a United States court's
judgment.
(HEMOSOL LOGO)
March 10, 2004
Dear Securityholders:
As you may be aware, Hemosol Inc. has signed an agreement with MDS Inc.
regarding a proposed reorganization of Hemosol's business that will allow
Hemosol's business to exchange, in effect, a significant portion of its existing
and unutilized income tax losses and other tax assets for a $16 million cash
infusion.
Hemosol needs additional cash as existing financial resources will not be
sufficient to allow Hemosol to continue activities after June 2004. In light of
Hemosol's current financial condition, the cash resources required to exploit
Hemosol's technologies and other opportunities, coupled with the dilutive cost
and other limitations of raising equity capital, this transaction is critical to
Hemosol's success. The proceeds from the proposed transaction will allow Hemosol
to continue the development of HEMOLINK(TM) and its other product candidates as
well as to advance the implementation of the recently announced alliance with
ProMetic.
As the proposed transaction requires the approval of Hemosol securityholders,
you are invited to attend an annual and special meeting to be held at the TSX
Broadcast Centre, Gallery Room, 130 King Street West, Toronto, Ontario on April
20, 2004 at 10:00 a.m. (Toronto time) to consider the proposed transaction, the
annual meeting matters and the other matters outlined in the accompanying notice
of meeting.
The proposed transaction is to be implemented through an arrangement under the
Business Corporations Act (Ontario) involving Hemosol, its securityholders and
MDS. The key components of the proposed transaction are:
- Shareholders of Hemosol will retain 93% of their existing interest in
the business of Hemosol which will be transferred, in effect, to a new
corporate entity to be named Hemosol Corp. (New Hemosol). Existing
shares of Hemosol will be exchanged for an equal number of shares of New
Hemosol.
- Hemosol will be renamed LPBP Inc. (Labco) and will acquire, in effect,
MDS's Ontario clinical laboratory services business.
- The remaining 7% interest in the business of Hemosol will be retained by
Labco (MDS will own 99.56% of the equity of Labco, representing not more
than 47.5% of the voting securities) and, as compensation for such
retention, each Hemosol shareholder (other than MDS) will receive:
- one Class A share of Labco for each Hemosol share that in the
aggregate will participate in 0.44% of the annual distributions from
Labco; and
- the benefit of reduced dilution through a reduction of 2.5 million
warrants of Hemosol with an exercise price of $1 to which MDS is
entitled in connection with its guarantee of Hemosol's 2002 bank
facility.
- The proposed transaction will result in the exchange of a significant
portion of the existing and unutilized income tax losses and other tax
assets historically generated by Hemosol's business for a $16 million
cash infusion into New Hemosol.
- Outstanding warrants and options to acquire Hemosol shares will become
warrants and options to acquire New Hemosol shares. There will be a
$0.04 reduction in exercise price because these warrants and options
will not be exercisable into the new Class A shares to be received by
existing shareholders.
The independent committee of the Hemosol board formed to consider the proposed
transaction believes that the exchange of 7% of Hemosol's business for the
interest in MDS's Ontario clinical laboratory services business, as well as the
reduction in dilution resulting from the 2.5 million warrant decrease, is an
exchange of comparable values for Hemosol shareholders and should not be
considered as dilutive.
The resolution approving the proposed transaction must be approved by at least
two-thirds of the votes cast by Hemosol securityholders (voting together as a
single class) at the meeting, and by a simple majority of the votes cast by
shareholders at the meeting, excluding the votes of MDS and certain related
persons. Shareholders will be
entitled to one vote per share, holders of Hemosol warrants (other than MDS)
will be entitled to one vote per warrant and holders of broker options will be
entitled to one and one-half votes per broker option.
The independent committee of the Hemosol board and the Hemosol board have
concluded that the proposed transaction is in the best interests of Hemosol and
is fair, from a financial point of view, to Hemosol securityholders, other than
MDS and its affiliates. THE HEMOSOL BOARD RECOMMENDS THAT HEMOSOL
SECURITYHOLDERS VOTE IN FAVOUR OF THE PROPOSED TRANSACTION.
Among the factors considered by the independent committee and the Hemosol board
was the opinion of KPMG Corporate Finance Inc., the independent financial
advisor to the independent committee, that the proposed transaction is fair,
from a financial point of view, to Hemosol securityholders, other than MDS and
its affiliates.
The accompanying management information circular provides a detailed description
of the proposed transaction. Please give this material your careful
consideration and, if you require assistance, consult your financial, tax or
other professional advisors.
On behalf of the Hemosol board and my colleagues, I would like to emphasize the
importance we see in this transaction to Hemosol's future and its ability to
deliver the investment returns we believe exist within its assets. We hope that
you will be able to attend the meeting. Whether or not you are able to attend,
we would encourage you to sign and return your proxy (printed on blue paper for
shareholders of Hemosol and, if applicable, on green paper for warrantholders
and holders of broker options of Hemosol) to ensure that your vote is recorded.
Yours very truly,
(signed) LEE D. HARTWELL
Lee D. Hartwell
President, Chief Executive Officer &
Chief Financial Officer
(HEMOSOL LOGO)
NOTICE OF ANNUAL AND SPECIAL MEETING OF SECURITYHOLDERS
NOTICE IS HEREBY GIVEN that an annual and special meeting (the "Meeting")
of shareholders (the "Shareholders"), warrantholders and holders of broker
options (collectively, the "Securityholders") of Hemosol Inc. ("Hemosol") will
be held at the TSX Broadcast Centre, Gallery Room, 130 King Street West,
Toronto, Ontario on April 20, 2004 at 10:00 a.m. (Toronto time) for the
following purposes:
1. for Securityholders to consider, pursuant to an order of the Superior
Court of Justice of Ontario dated March 9, 2004 (the "Interim
Order"), and, if deemed advisable, pass, with or without variation, a
special resolution (the "Arrangement Resolution"), the full text of
which is set forth in Annex A to the accompanying Management
Information Circular (the "Circular"), approving a plan of
arrangement (the "Proposed Arrangement") under section 182 of the
Business Corporations Act (Ontario) involving Hemosol, the
Securityholders and MDS Inc.;
2. for Shareholders to consider the following annual meeting matters:
(a) to receive and consider the annual financial statements of Hemosol
for the year ended December 31, 2003 and the report of the auditors
thereon;
(b) to elect the directors of Hemosol; and
(c) to appoint the auditors of Hemosol and to authorize the directors
to fix their remuneration;
3. for Shareholders to consider the following items of other special
business:
(a) to consider and, if deemed advisable, pass, with or without
variation, an ordinary resolution, the full text of which is set
forth in the accompanying Circular, approving an amendment to the
Amended and Restated Stock Option Plan of Hemosol dated December 7,
2000 to increase the maximum number of common shares of Hemosol
reserved for issuance thereunder from 3,031,712 to 5,499,298 in
order to ratify the conditional grant of certain stock options;
(b) if the Arrangement Resolution is passed, to consider and, if deemed
advisable, pass, with or without variation, an ordinary resolution,
the full text of which is set forth in the accompanying Circular,
approving a stock option plan for Hemosol Corp., which will be the
successor to Hemosol's current business under the Proposed
Arrangement; and
(c) if the Arrangement Resolution is passed, to consider and, if deemed
advisable, pass, with or without variation, an ordinary resolution,
the full text of which is set forth in the accompanying Circular,
approving an amendment and restatement of the by-laws of LPBP Inc.,
as Hemosol will be renamed under the Proposed Arrangement; and
4. to transact such other business as may properly be brought before the
Meeting and any postponement(s) or adjournment(s) thereof.
Only Securityholders of record at the close of business on March 17, 2004,
the record date for the Meeting, will be entitled to notice of, to attend and to
vote at, the Meeting and any postponement(s) or adjournment(s) thereof in
respect of the relevant resolution(s), except to the extent that a
Securityholder has transferred any securities of Hemosol subsequent to the
record date and the new holder of such securities establishes proper ownership
and requests, not less than 10 days before the date of the Meeting, to be
included in the list of Securityholders eligible to vote at the Meeting in
respect of the relevant resolution(s).
Whether or not you intend to attend the Meeting, you are requested to
complete the enclosed form of proxy (printed on blue paper for Shareholders and,
if applicable, on green paper for Securityholders who are not Shareholders) in
accordance with the instructions set out therein and in the Circular and return
the form of proxy in the appropriate envelope provided for that purpose. To be
effective, proxies must be received either by mail or
delivery addressed to Computershare Trust Company of Canada at 100 University
Avenue, 9(th) Floor, Toronto, Ontario M5J 2Y1 or by facsimile toll-free at
1-866-249-7775 (or in the Toronto area at (416) 263-9524), in each case prior to
5:00 p.m. (Toronto time) on April 16, 2004 or, if the Meeting is adjourned or
postponed, not less than 48 hours (excluding Saturdays, Sundays and holidays)
before the time the adjourned Meeting is reconvened or the postponed Meeting is
convened. Proxies may also be deposited with the scrutineers of the Meeting, to
the attention of the chair of the Meeting, at or immediately prior to the
commencement of the Meeting or any postponement(s) or adjournment(s) thereof.
DATED at Toronto, Ontario this 10(th) day of March, 2004.
BY ORDER OF THE BOARD OF DIRECTORS,
(signed) LEE D. HARTWELL
Lee D. Hartwell
President, Chief Executive Officer & Chief Financial Officer
SUMMARY TERM SHEET
The following term sheet highlights the material terms of the proposed
arrangement described in this management information circular. This summary term
sheet is qualified in its entirety by the more detailed information appearing
elsewhere in this circular. You are urged to read carefully this entire document
and the documents which are referred to in this document. In this summary term
sheet, references to "we", "our", "us" and "Hemosol" refer to Hemosol Inc. Under
the arrangement, Hemosol will change its name to LPBP Inc., and references to
"Labco" in this circular refer to LPBP Inc. All amounts in this circular are
expressed in Canadian dollars unless otherwise specifically indicated. Unless
otherwise specifically indicated, the information contained in this circular is
presented as at March 10, 2004.
MEETING: On April 20, 2004, we will hold an annual and special
meeting of our securityholders (including our
shareholders, warrantholders and holders of broker
options) at which you will be asked to consider an
arrangement under section 182 of the Business
Corporations Act (Ontario) involving Hemosol, its
securityholders and MDS Inc., which we refer to as
MDS. We will also ask our shareholders to consider
and vote on the other matters referred to in the
accompanying Notice of Annual and Special Meeting.
The annual and special meeting will be held at the
TSX Broadcast Centre, Gallery Room, 130 King Street
West, Toronto, Ontario on Tuesday, April 20, 2004
commencing at 10:00 a.m. (Toronto time).
See "Annual Meeting and Other Special Business" and
"General Proxy Matters".
RECOMMENDATION OF THE BOARD
OF DIRECTORS: OUR BOARD OF DIRECTORS, HAVING CONSIDERED, AMONG
OTHER THINGS, THE REASONS FOR THE ARRANGEMENT, THE
RECOMMENDATIONS OF THE INDEPENDENT COMMITTEE OF OUR
BOARD OF DIRECTORS THAT WAS FORMED TO EVALUATE THE
ARRANGEMENT, AND THE FAIRNESS OPINION PROVIDED BY
KPMG CORPORATE FINANCE INC., WHICH WE REFER TO AS
KPMG, HAS DETERMINED THAT THE ARRANGEMENT IS IN THE
BEST INTERESTS OF HEMOSOL AND IS FAIR, FROM A
FINANCIAL POINT OF VIEW, TO SECURITYHOLDERS OF
HEMOSOL (OTHER THAN MDS AND ITS AFFILIATES) AND
RECOMMENDS THAT YOU VOTE IN FAVOUR OF THE
ARRANGEMENT.
See "Special Factors -- Recommendation of the Hemosol
Board".
RECORD DATE: The record date for the determination of
securityholders entitled to notice of and to vote at
the annual and special meeting is March 17, 2004.
SECURITYHOLDER APPROVAL: In order to proceed, the arrangement must be approved
by:
- at least two-thirds of all the votes cast by
securityholders (other than MDS in its capacity of
warrantholder) voting together as a single class,
in person or by proxy, at the annual and special
meeting; and
- a majority of all the votes cast by shareholders
(excluding the votes of MDS and certain related
persons) voting, in person or by proxy, at the
annual and special meeting.
See "The Arrangement -- Securityholder Approvals".
PURPOSE OF THE ARRANGEMENT:The purpose of the arrangement is to provide a $16
million cash infusion into our blood products
business through the utilization of a significant
portion of our accumulated and unutilized tax losses
and other tax assets. We have accumulated a
significant amount of tax losses from our research
and development activities to date and we do not
expect to be able to generate sufficient revenue from
our blood products business in the near term to
utilize such losses.
EFFECTS OF THE ARRANGEMENT:Under the arrangement:
- You will receive one common share of New Hemosol
and one Class A common share of Labco in exchange
for each common share of Hemosol that you hold.
- Our outstanding convertible securities will become
convertible securities to purchase common shares
of New Hemosol on identical terms (other than a
reduction of the exercise price by $0.04 per share
to account for the fact that convertible
securityholders will not be entitled to receive
Class A common shares of Labco on exercise).
- Our stock options will be replaced with stock
options to purchase common shares of New Hemosol
with the same vesting and exercise terms and an
exercise price equal to the exercise price of the
existing stock option less $0.04, except that
certain holders of our stock options will only
receive stock options to purchase common shares of
New Hemosol in respect of stock options that were
conditionally granted to them in 2003 as a
retention incentive (which grants you are being
asked to ratify at the meeting) and not in respect
of other stock options.
THE ARRANGEMENT: The arrangement involves a reorganization of our
blood products business and MDS's Ontario clinical
laboratory services business. Under the arrangement:
- We will transfer effective ownership and control
of our existing blood products business to a new
entity to be called Hemosol Corp., which we refer
to as New Hemosol.
- MDS will transfer effective ownership of its
Ontario clinical laboratory services business to
Hemosol.
- Hemosol will change its name to LPBP Inc. and will
be referred to as Labco.
- Operational control of the Ontario clinical
laboratory services business will, in effect,
remain with MDS.
- Labco will retain a 7% equity interest in our
blood products business.
- New Hemosol will receive a cash infusion of $16
million.
- Labco will be able to utilize its income tax
losses against income from the Ontario clinical
laboratory services business and income, if any,
from Labco's 7% interest in our blood products
business.
- The shareholdings of New Hemosol immediately after
the arrangement will be on the same proportionate
basis as the shareholdings of Hemosol immediately
prior to the arrangement. The Class A common
shares of Labco issued to our shareholders (other
than MDS) will represent an aggregate of 0.44% of
the equity of Labco, but will have not less than
52.5% of the aggregate number of votes attached to
all shares of Labco. MDS will own 99.56% of the
equity of Labco through a combination of voting
and non-voting shares.
- MDS will surrender 2.5 million of its 10 million
warrants to purchase common shares of Hemosol that
it currently holds or has the right to receive in
certain circumstances.
See "The Arrangement -- Transaction Steps Outside the
Plan of Arrangement" and "-- Transaction Steps Under
the Plan of Arrangement".
(ii)
FAIRNESS OPINION: KPMG has provided an opinion to our board of
directors and to the independent committee of our
board of directors that the arrangement is fair, from
a financial point of view, to our securityholders
(other than MDS and its affiliates).
See "Special Factors -- KPMG Fairness Opinion" and
"Annex E -- KPMG Fairness Opinion".
INDEPENDENT COMMITTEE: Our board of directors has established an independent
committee to evaluate the arrangement, oversee the
negotiation of the terms of the arrangement and make
a recommendation to the entire board. The independent
committee has determined that the arrangement is in
Hemosol's best interests and is fair, from a
financial point of view, to our securityholders
(other than MDS and its affiliates) and has
recommended that our board of directors recommend to
the securityholders that they vote in favour of the
arrangement.
See "Special Factors -- Recommendation of the
Independent Committee".
NO DISSENT RIGHTS: You will not have any right to dissent and be paid
the fair value of your securities in connection with
the arrangement.
See "The Arrangement -- Court Approval".
SPECIAL FACTORS: For a more detailed description of the matters
relating to the (i) purposes, alternatives, reasons
and effects of the arrangement, (ii) fairness of the
arrangement and (iii) reports, opinions, appraisals
and negotiations relating to the arrangement, see
"Special Factors -- Purpose of the Arrangement", "--
Background to the Arrangement", "-- Alternatives
Considered", "-- Reasons for the Arrangement", "--
Effects of the Arrangement", "-- Recommendation of
the Independent Committee", "-- Recommendation of the
Hemosol Board", "-- KPMG Fairness Opinion", "--
Management Projections", "-- Reasons Why MDS and MDS
Subco Consider the Arrangement to be Fair to Non-MDS
Securityholders" and "-- Draft Report of
PricewaterhouseCoopers LLP".
RISK FACTORS: In deciding whether to approve the arrangement, we
urge you to consider the risk factors described in
this circular. See "Risk Factors" and "Income Tax
Considerations".
U.S. SHAREHOLDERS: U.S. shareholders should consider that they will
likely be treated as receiving a taxable distribution
of New Hemosol Shares from Labco for U.S. federal
income tax purposes. If Labco is treated as having
earnings and profits for the taxable year ending
October 31, 2004, then the fair market value of the
deemed distribution will generally be taxed as
ordinary income to the extent of such earnings and
profits. Hemosol believes that Labco should not have
earnings and profits for the taxable year ending
October 31, 2004. However, U.S. shareholders should
consider the risk that for the taxable year ending
October 31, 2004, Labco may be treated as having
earnings and profits. See "Income Tax Considerations
-- Certain United States Federal Income Tax
Considerations" and "Risk Factors -- Risks Relating
to Labco -- US Holders of Hemosol Shares may be
treated as receiving a taxable distribution from
Labco for U.S. federal income tax purposes".
(iii)
TABLE OF CONTENTS
<Table>
SUMMARY..................................................... 5
FORWARD-LOOKING STATEMENTS.................................. 13
PRESENTATION OF FINANCIAL INFORMATION....................... 13
CURRENCY EXCHANGE RATES..................................... 13
NOTICE REGARDING INFORMATION................................ 14
SPECIAL FACTORS............................................. 15
Purpose of the Arrangement................................ 15
Background to the Arrangement............................. 15
Alternatives Considered................................... 17
Reasons for the Arrangement............................... 17
Effects of the Arrangement................................ 17
Recommendation of the Independent Committee............... 19
Recommendation of the Hemosol Board....................... 20
KPMG Fairness Opinion..................................... 21
Management Projections.................................... 27
Reasons Why MDS and MDS Subco Consider the Arrangement to
be Fair to Non-MDS Securityholders..................... 28
Draft Report of PricewaterhouseCoopers LLP................ 30
THE ARRANGEMENT............................................. 34
Pre-Arrangement Organizational Structure.................. 34
Transaction Steps Outside the Plan of Arrangement......... 34
Transaction Steps Under the Plan of Arrangement........... 35
Post-Arrangement Organizational Structure................. 37
Treatment of Hemosol Convertible Securities in Connection
with the Arrangement................................... 38
Treatment of Hemosol Options in Connection with the
Arrangement............................................ 39
Mutual Conditions......................................... 39
Conditions in Favour of Hemosol........................... 40
Conditions in Favour of MDS............................... 40
Non-Solicitation.......................................... 40
Termination and Expense Reimbursement..................... 40
Other Terms of the Arrangement Agreement.................. 41
Escrow Agreement.......................................... 41
Indemnity Agreements...................................... 42
Securityholder Approvals.................................. 42
Court Approval............................................ 42
Toronto Stock Exchange and NASDAQ Listings................ 43
Distribution of Share Certificates........................ 43
Eligibility for Investment in Canada...................... 43
Source of Funds........................................... 44
Expenses of the Arrangement............................... 44
Accounting Treatment of the Arrangement................... 44
Agreement of MDS to Vote in Favour of the Arrangement..... 44
Interests of Certain Persons in the Arrangement........... 44
</Table>
1
<Table>
HEMOSOL PRIOR TO THE ARRANGEMENT............................ 45
Clinical Trials and Non-Clinical Analyses................. 45
Management and Employees.................................. 46
Strategic Alliance with ProMetic.......................... 46
Bio-Manufacturing Services................................ 48
Other Products............................................ 48
Property.................................................. 48
Significant Corporate Transactions........................ 48
Credit Facility........................................... 48
Clinical Trial Support Services........................... 50
NASDAQ Listing Qualifications Panel Hearing............... 50
Special Warrant Offering.................................. 50
January Special Meeting................................... 51
Consolidated Capitalization............................... 51
Price Range and Trading Volume of Hemosol Shares.......... 52
Ownership of Securities................................... 53
Securities Transactions................................... 55
Dividend Policy........................................... 55
Previous Distributions.................................... 55
Documents Incorporated by Reference....................... 56
NEW HEMOSOL AFTER THE ARRANGEMENT........................... 58
New Hemosol............................................... 58
Share Capital............................................. 58
Principal Shareholders.................................... 59
Directors and Officers.................................... 59
Employees................................................. 59
New Hemosol Convertible Securities........................ 59
New Hemosol Stock Option Plan............................. 59
Selected New Hemosol Historical and Pro Forma Financial
Information............................................ 60
Registered Office......................................... 60
LABCO AFTER THE ARRANGEMENT................................. 61
Labco After the Arrangement............................... 61
Objects................................................... 61
Description of Share Capital.............................. 62
Principal Shareholders.................................... 68
Directors and Officers.................................... 68
Change of Fiscal Year-End................................. 68
Registered Office......................................... 69
Auditors, Transfer Agent and Registrar of Labco........... 69
Material Contracts of Labco............................... 69
Interests of Management and Others in Material
Transactions........................................... 69
Selected Labco Pro Forma Financial Information............ 69
</Table>
2
<Table>
THE BLOOD PRODUCTS PARTNERSHIP AFTER THE ARRANGEMENT........ 70
General................................................... 70
Business of the Blood Products Partnership................ 70
Distributions and Allocation of Profit and Loss........... 70
Reimbursement of General Partner Expenses................. 70
No Removal of General Partner............................. 70
Term...................................................... 71
Transfer of Units......................................... 71
Employees................................................. 71
Financial Information..................................... 71
THE LABS PARTNERSHIP AFTER THE ARRANGEMENT.................. 72
General................................................... 72
Distributions and Allocation of Profit and Loss........... 72
Removal of General Partner................................ 72
Term...................................................... 72
U.S. Tax Election......................................... 73
Labs Management Agreement................................. 73
Transfer of Units......................................... 73
Business of the Labs Partnership.......................... 73
Unaudited Summary Financial Information Concerning the
Labs Business.......................................... 78
Management's Discussion and Analysis...................... 80
REGULATORY MATTERS.......................................... 82
Securities Law Matters.................................... 82
OSC Rule 61-501 and AMF Policy Q-27....................... 83
Financial Information Exemption........................... 83
Competition Act (Canada).................................. 84
HSR Act................................................... 84
INCOME TAX CONSIDERATIONS................................... 85
Certain Canadian Federal Income Tax Considerations........ 85
Certain United States Federal Income Tax Considerations... 88
Residents of Jurisdictions Outside Canada and the United
States................................................. 95
RISK FACTORS................................................ 96
Risks Relating to New Hemosol............................. 96
Risks Relating to the Blood Products Partnership.......... 96
Risks Relating to Labco................................... 102
Risks Relating to the Labs Partnership.................... 104
ANNUAL MEETING AND OTHER SPECIAL BUSINESS................... 107
Election of Directors..................................... 107
Appointment of Auditors................................... 108
Executive Compensation.................................... 109
Human Resources and Compensation Committee Report......... 110
Performance Graph......................................... 112
Directors' Compensation................................... 112
Interest of Insiders in Material Transactions............. 112
</Table>
3
<Table>
Corporate Governance...................................... 113
Directors' and Officers' Insurance........................ 117
Ratification of Conditional Grants of Options............. 117
Approval of New Hemosol Stock Option Plan................. 118
Approval of Amended and Restated Labco By-Laws............ 118
GENERAL PROXY MATTERS....................................... 119
Purpose of the Meeting.................................... 119
Date, Time and Place of Meeting........................... 119
Solicitation of Proxies................................... 119
Appointment of Proxyholder................................ 119
Non-Registered Holders.................................... 120
Revocation of Proxy....................................... 120
Exercise of Vote by Proxy................................. 120
Quorum, Record Date and Entitlement to Vote............... 121
Voting Securities and Principal Holders Thereof........... 121
Procedure and Votes Required.............................. 121
ADDITIONAL INFORMATION...................................... 123
APPROVAL OF HEMOSOL......................................... 123
AUDITORS' CONSENT........................................... 124
SCHEDULE 1 -- GLOSSARY OF TERMS........................ 125
ANNEX A -- FORM OF ARRANGEMENT RESOLUTION.............. A-1
ANNEX B -- NOTICE OF APPLICATION....................... B-1
ANNEX C -- INTERIM ORDER............................... C-1
ANNEX D -- ARRANGEMENT AGREEMENT AND PLAN OF
ARRANGEMENT........................................... D-1
ANNEX E -- KPMG FAIRNESS OPINION....................... E-1
ANNEX F -- NEW HEMOSOL STOCK OPTION PLAN............... F-1
ANNEX G -- SUMMARY HISTORICAL FINANCIAL INFORMATION FOR
HEMOSOL............................................... G-1
ANNEX H -- BALANCE SHEET OF NEW HEMOSOL................ H-1
ANNEX I -- PRO FORMA FINANCIAL STATEMENTS FOR NEW
HEMOSOL............................................... I-1
ANNEX J -- PRO FORMA FINANCIAL STATEMENTS FOR LABCO.... J-1
ANNEX K -- DIRECTORS AND OFFICERS OF HEMOSOL........... K-1
ANNEX L -- DIRECTORS AND OFFICERS OF MDS AND MDS
SUBCO................................................. L-1
ANNEX M -- AMENDED AND RESTATED LABCO BY-LAWS.......... M-1
</Table>
4
SUMMARY
The following summarizes certain material information contained elsewhere
in this Circular. This summary is not intended to be complete and is qualified
in its entirety by the more detailed information contained elsewhere in this
Circular and in the documents incorporated by reference. Securityholders are
urged to read this Circular and the documents incorporated by reference
carefully and in their entirety. Capitalized terms used herein without
definition are defined in the Glossary of Terms or elsewhere in this Circular.
PURPOSE OF THE MEETING
The purpose of the Meeting is for:
- Securityholders to consider and, if deemed advisable, pass, with or
without variation, the Arrangement Resolution to approve the Arrangement
under section 182 of the OBCA;
- Shareholders to conduct the annual meeting business of Hemosol,
including electing directors, appointing auditors and authorizing the
Hemosol Board to fix the auditors' remuneration; and
- Shareholders to consider, and if deemed advisable, pass, with or without
variation, resolutions to approve the Hemosol Stock Option Plan
Amendment in order to ratify the conditional grant of certain options
and, if the Arrangement Resolution is passed, the New Hemosol Stock
Option Plan and the Amended and Restated Labco By-Laws.
DATE, TIME AND PLACE
The Meeting will be held on Tuesday, April 20, 2004 commencing at 10:00
a.m. (Toronto time) at the TSX Broadcast Centre, Gallery Room, 130 King Street
West, Toronto, Ontario.
SECURITYHOLDER APPROVALS FOR THE ARRANGEMENT
The Interim Order provides that, for the Arrangement to be implemented, the
Arrangement Resolution must be passed, with or without variation, by:
- at least two-thirds of all the votes cast by Securityholders voting
together as a single class, in person or by proxy, at the Meeting; and
- a majority of all the votes cast by Minority Shareholders voting, in
person or by proxy, at the Meeting.
See "The Arrangement -- Securityholder Approvals" in this Circular.
EFFECTS OF THE ARRANGEMENT
Under the Arrangement, on the Effective Date:
- Shareholders will receive one New Hemosol Share and one Labco Class A
Share for each Hemosol Share that they held immediately prior to the
Effective Time, and the Hemosol Shares will cease to exist;
- each Hemosol Convertible Security will become a New Hemosol Convertible
Security with terms identical to the Hemosol Convertible Security, other
than a reduction of the exercise price by $0.04; and
- each Hemosol Option will be cancelled and replaced with a New Hemosol
Option having vesting and exercise terms identical to those of the
cancelled Hemosol Option and an exercise price equal to the exercise
price of such cancelled Hemosol Option less $0.04, except that holders
of Hemosol Options that so consent will only receive New Hemosol Options
in respect of cancelled Hemosol Options that are Specified Hemosol
Options and will not receive any New Hemosol Options in respect of
cancelled Hemosol Options that are not Specified Hemosol Options.
5
THE ARRANGEMENT
The purpose of the Arrangement is to provide a $16 million cash infusion
into the Blood Products Business through the utilization of Hemosol's existing
and unutilized Tax Losses. The Arrangement involves a reorganization of the
Blood Products Business of Hemosol and the Labs Business of MDS. Under the
Arrangement:
- Hemosol will transfer the Blood Products Business to the Blood Products
Partnership and the Blood Products Partnership will assume the Blood
Products Liabilities. Following the transfer by Hemosol of the Blood
Products Business to the Blood Products Partnership, Hemosol is referred
to as "Labco". On completion of the Arrangement:
- approximately 93% of the Blood Products Partnership will be owned by
New Hemosol, which will control the Blood Products Partnership as
its general partner; and
- approximately 7% of the Blood Products Partnership will be owned by
Labco as a limited partner.
- MDS will transfer the Labs Business to the Labs Partnership. On
completion of the Arrangement:
- 99.99% of the Labs Partnership will be owned by Labco as a limited
partner; and
- 0.01% of the Labs Partnership will be owned by MDS Subco, which will
control the Labs Partnership as its general partner.
- New Hemosol will receive cash redemption proceeds of $16 million on the
Effective Date from Labco (which will be funded by a loan from the Labs
Partnership). $1 million of such proceeds will be held in escrow to
satisfy liabilities relating to the Blood Products Business remaining
with Labco, if any, of which Labco becomes aware within a one-year
period following the Effective Date.
- MDS will surrender the Surrendered Warrants through the following steps:
- the Tranche A Warrants to purchase up to 6,000,000 Hemosol Shares
will be replaced with warrants of New Hemosol to purchase up to
5,500,000 New Hemosol Shares on identical terms (subject to a
reduction of the exercise price by $0.04 per Tranche A Warrant); and
- MDS's existing right to receive Tranche B Warrants to purchase up to
4,000,000 Hemosol Shares in certain circumstances will be replaced
with the right to receive warrants of New Hemosol to purchase up to
2,000,000 New Hemosol Shares, on identical terms (subject to a
reduction of the exercise price by $0.04 per Tranche B Warrant).
- The share ownership of New Hemosol, which will be in effect the
successor to the Blood Products Business, will mirror Hemosol's share
ownership immediately prior to the Effective Date. It is a condition of
closing that the New Hemosol Shares be listed on the TSX and quoted on
NASDAQ. The Labco Class A Shares will not be listed or posted for
trading on the TSX or any other stock exchange or market and will not be
quoted on NASDAQ. Following completion of the Arrangement, New Hemosol
and Labco will each be a reporting issuer in Canada and a registrant in
the United States.
- The share ownership of Labco, which will be in effect the successor to
the Labs Business, will be such that Public Shareholders will hold 0.44%
of Labco's equity securities (through their ownership of not less than
52.5% of the voting shares of Labco) and MDS will hold the remaining
99.56% of Labco's equity securities (through its ownership of not more
than 47.5% of the voting shares and 100% of the non-voting shares of
Labco).
- Labco will utilize the Tax Losses against income that it receives from
the Partnerships.
See "The Arrangement -- Transaction Steps Outside the Plan of Arrangement"
and "-- Transaction Steps Under the Plan of Arrangement" in this Circular.
6
PRE- AND POST-ARRANGEMENT ORGANIZATIONAL STRUCTURE
The following diagram sets out the corporate structure of Hemosol
immediately prior to the Effective Time (assuming that MDS's shareholdings of
Hemosol immediately prior to the Effective Time are the same as its current
shareholdings).
(PRE-ARRANGEMENT ORGANIZATIONAL STRUCTURE DIAGRAM)
The following diagram sets out the corporate structure of Labco and New
Hemosol immediately following the Effective Time (assuming that MDS's
shareholdings of Hemosol immediately prior to the Effective Time are the same as
its current shareholdings).
(POST-ARRANGEMENT ORGANIZATIONAL STRUCTURE DIAGRAM)
- ---------------
Notes:
(1) While Public Shareholders will hold 0.44% of Labco's equity securities
through their holdings of Labco Class A Shares, such shares will have
attached thereto not less than 52.5% of the votes attaching to all voting
shares of Labco.
(2) While MDS will hold 99.56% of Labco's equity securities through its holdings
of Labco Class A Shares and Labco Class B Non-Voting Shares, such shares
will have attached thereto not more than 47.5% of the votes attaching to all
voting shares of Labco.
7
BACKGROUND AND REASONS FOR THE ARRANGEMENT
Hemosol is a biopharmaceutical company focused on the discovery,
development and manufacture of products based on human blood proteins. Hemosol
has a range of products in development, including its principal oxygen
therapeutic product, HEMOLINK. Hemosol is also developing additional
therapeutics and a hemoglobin-based delivery platform to treat diseases such as
hepatitis C and cancers of the liver, as well as a cell therapy initially
directed to the treatment of cancer through its cell expansion and stem cell
research activities. In addition to the products currently under development,
Hemosol intends to use its state-of-the-art Hemolink Building to produce
valuable therapeutic plasma-based proteins pursuant to the recently announced
strategic alliance with ProMetic.
Hemosol's ability to continue as a going concern is dependent on its
ability to secure financing or to generate revenues in order to be able to
continue its development activities and successfully bring its products to
market. On January 31, 2004, Hemosol had approximately $7.1 million in cash and
cash equivalents. Hemosol has fully drawn down all amounts available under the
Bank Loan. As a result of cost savings plans implemented in June 2002 and April
2003, Hemosol's average monthly cash burn-rate has been reduced to approximately
$1.2 million. Hemosol estimates that existing financial resources will not be
sufficient to allow it to continue its development activities after June 2004
unless additional financing is obtained.
The purpose of the Arrangement is to provide a $16 million cash infusion
into the Blood Products Business through the utilization of Hemosol's existing
and unutilized Tax Losses. As Hemosol's operations to date have been focused on
research and development activities, Hemosol has had losses from operations for
each fiscal year since its inception in 1985 and has, as a result, accumulated a
significant amount of Tax Losses which it is currently unable to utilize.
MDS approached Hemosol in September 2003 with a proposal for the
Arrangement. CCRA issued the Tax Ruling on September 23, 2003, as supplemented
on February 5, 2004, which sets out the steps for the restructuring of Hemosol
and the Labs Business that would allow the Tax Losses to be utilized against
income from the Labs Business. On September 17, 2003, the Hemosol Board
established the Independent Committee to evaluate the Arrangement, oversee the
negotiation of its terms and make a recommendation to the Hemosol Board as to
whether it is fair, from a financial point of view, to Non-MDS Securityholders.
On October 31, 2003, Hemosol and MDS executed a non-binding Letter of
Understanding setting out the understanding between Hemosol and MDS regarding
the Arrangement and referring to a cash infusion into the Blood Products
Business within a range of $10 to $15 million, subject to negotiation.
During the period between August and October 2003, Hemosol received a
number of expressions of interest involving the Tax Losses, including the
expression of interest of MDS referred to above. Hemosol received two non-
binding written proposals for transactions involving the Tax Losses from parties
other than MDS. Hemosol did not pursue such proposals, as they involved cash
infusions that were significantly below the range referred to in the Letter of
Understanding and in Hemosol's view, the likelihood of successful completion of
such proposals was below that of the proposal from MDS, particularly in light of
MDS having obtained the Tax Ruling.
Hemosol's management, with the active involvement and supervision by the
Independent Committee, negotiated the terms of the Arrangement and determined
the aggregate consideration for the Arrangement, including the cash infusion of
$16 million into the Blood Products Business, the surrender of the Surrendered
Warrants, the indirect transfer of approximately 7% of the equity interest in
the Blood Products Business to Labco and the indirect transfer of approximately
0.44% of the equity interest of the Labs Business to Public Shareholders. As a
result of these negotiations, on February 11, 2004, Hemosol and MDS entered into
the Arrangement Agreement and a press release was issued by each of Hemosol and
MDS on the morning of February 12, 2004.
The Arrangement provides Hemosol with the opportunity to raise cash for the
Blood Products Business in a manner that is considerably less dilutive than, and
does not have the other limitations of, raising equity capital and will allow
New Hemosol to continue the development of HEMOLINK and the other product
candidates of Hemosol and to advance the implementation of the recently
announced alliance with ProMetic.
Although New Hemosol will not have the future benefit of applying the Tax
Losses against income, it is expected that the Blood Products Partnership will
not be able to generate sufficient revenues from the Blood Products Business in
the near term to utilize such Tax Losses and that it will continue to generate
additional tax losses until it is able to commercialize HEMOLINK and/or one or
more of its other product candidates or generate
8
revenues from the utilization of the Hemolink Building. In addition, the Blood
Products Partnership will have the ability to utilize the undepreciated capital
cost of the Blood Products Assets against future income.
See "Special Factors" in this Circular.
FAIRNESS OPINION
KPMG was engaged by the Independent Committee to act as financial advisor
to the Independent Committee in respect of the Arrangement. KPMG provided an
opinion to the Hemosol Board and the Independent Committee that, subject to the
assumptions and qualifications set out in the KPMG Fairness Opinion, the
Arrangement is fair, from a financial point of view, to Non-MDS Securityholders.
The full text of the KPMG Fairness Opinion is reproduced in Annex E of this
Circular. Also see "Special Factors -- KPMG Fairness Opinion".
DELIBERATIONS AND RECOMMENDATIONS OF THE INDEPENDENT COMMITTEE
After detailed consideration of the matter, the Independent Committee
concluded that the Arrangement is in Hemosol's best interests and is fair, from
a financial point of view, to Non-MDS Securityholders. Accordingly, the
Independent Committee unanimously recommended that the Hemosol Board recommend
to the Securityholders that they vote in favour of the Arrangement Resolution.
In reaching such conclusions, the Independent Committee obtained the advice of
its professional advisors, completed a detailed examination of the process
leading to the execution of the Arrangement Agreement, examined the terms and
conditions of the Arrangement, the Arrangement Agreement and the KPMG Fairness
Opinion, had discussions with Hemosol's senior management with respect to, among
other things, the business, assets, financial condition and prospects of
Hemosol, reviewed the information provided in connection with the Arrangement,
had discussions with the professional advisors to Hemosol and examined all other
relevant documents and information. See "Special Factors -- Recommendation of
the Independent Committee" in this Circular.
RECOMMENDATION OF THE HEMOSOL BOARD
THE HEMOSOL BOARD, HAVING CONSIDERED, AMONG OTHER THINGS, THE REASONS FOR
THE ARRANGEMENT, THE RECOMMENDATIONS OF THE INDEPENDENT COMMITTEE AND THE KPMG
FAIRNESS OPINION, UNANIMOUSLY (EXCLUDING FOUR DIRECTORS WHO ARE RELATED TO MDS,
EACH OF WHOM ABSTAINED FROM VOTING IN ACCORDANCE WITH THE OBCA) APPROVED THE
ARRANGEMENT, THE TERMS OF THE ARRANGEMENT AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY AND RECOMMENDS THAT THE SECURITYHOLDERS VOTE IN FAVOUR OF
THE ARRANGEMENT RESOLUTION.
See "Special Factors -- Recommendation of the Hemosol Board" in this
Circular.
NON-SOLICITATION
In the Arrangement Agreement, Hemosol has agreed that it will not (i)
solicit, initiate or encourage any inquiries or proposals regarding any merger,
amalgamation, arrangement, restructuring, take-over bid, sale or purchase of
substantial assets (including, without limitation, tax carryforward balances),
sale or purchase of securities (other than certain exceptions), business
combinations, reorganizations or recapitalizations (an "Acquisition Proposal")
or (ii) participate in any discussions or negotiations regarding, or furnish to
any person any information with respect to any of the foregoing.
Hemosol may respond to an unsolicited bona fide written Acquisition
Proposal which the Hemosol Board determines in good faith and in the proper
discharge of its fiduciary duties would, if consummated in accordance with its
terms, result in a transaction that is more favourable to the Shareholders
generally (without taking into account any benefits that MDS and its affiliates
and associates may receive under the Arrangement) than the Arrangement (a
"Superior Proposal"). See "The Arrangement -- Non-Solicitation" in this
Circular.
CONDITIONS TO CLOSING
The closing of the Arrangement is subject to customary conditions,
including the receipt of all necessary regulatory approvals (including approval
from the TSX, NASDAQ, the Department of National Defence and the MOH).
9
The closing of the Arrangement is also subject to certain conditions in
favour of MDS, including the following:
- there has been no change or development in respect of Hemosol or the
Blood Products Business that would result in any material impairment in
or materially adversely affect the ability of Labco to utilize the Tax
Losses after the Effective Date as contemplated in the Tax Ruling;
- MDS has obtained any amendments or supplements to the Tax Ruling deemed
necessary by its counsel or financial advisors in order to implement the
Arrangement and to allow Labco to utilize the Tax Losses after the
Effective Date as contemplated in the Tax Ruling; and
- there is no change in tax law that could result in any material
impairment in or materially adversely affect the Tax Ruling or the
ability of Labco to utilize the Tax Losses after the Effective Date as
contemplated in the Tax Ruling.
See "The Arrangement -- Mutual Conditions", "-- Conditions in Favour of
Hemosol" and "-- Conditions in Favour of MDS" in this Circular.
EXPENSE REIMBURSEMENT
Under the terms of the Arrangement Agreement, Hemosol must pay $1 million
to MDS in respect of expenses incurred by MDS in connection with the Arrangement
if the Arrangement Agreement is terminated by:
- MDS as a result of a breach by Hemosol of any of its representations or
warranties or covenants in the Arrangement Agreement;
- MDS if the Hemosol Board has modified, in a manner adverse to MDS, or
withdrawn its recommendation that the Securityholders approve the
Arrangement, the Hemosol Board has approved or recommended any Superior
Proposal, or Hemosol has entered into a binding agreement with respect
to a Superior Proposal;
- Hemosol upon its determination that an Acquisition Proposal constitutes
a Superior Proposal; or
- MDS or Hemosol if the Effective Date does not occur on or prior to the
Outside Date (provided that a condition to closing relating to actions
to be taken by Hemosol has not been fulfilled).
Similarly, MDS must pay $500,000 to Hemosol in respect of expenses incurred
by Hemosol in connection with the Arrangement if the Arrangement Agreement is
terminated by:
- Hemosol as a result of a breach by MDS of any of its representations or
warranties or covenants in the Arrangement Agreement;
- MDS or Hemosol if the Effective Date does not occur on or prior to the
Outside Date (provided that a condition to closing relating to actions
to be taken by MDS has not been fulfilled); or
- MDS if CCRA has refused to issue an amendment or supplement to the Tax
Ruling deemed necessary by MDS's counsel or financial advisors in order
to implement the Arrangement and to allow Labco to utilize the Tax
Losses after the Effective Date as contemplated in the Tax Ruling, or
there is a change in tax law that could result in any material
impairment in or materially adversely affect the Tax Ruling or the
ability of Labco to utilize the Tax Losses after the Effective Date as
contemplated in the Tax Ruling.
See "The Arrangement -- Termination and Expense Reimbursement" in this
Circular.
NEW HEMOSOL AFTER THE ARRANGEMENT
New Hemosol was incorporated on February 24, 2004 and has not carried on
any active business since its incorporation.
On the Effective Date, the New Hemosol Shares will be held by the Public
Shareholders and MDS (directly or indirectly) on the same pro rata basis as the
Hemosol Shares are held by such persons immediately prior to the Effective Time.
Following the completion of the Arrangement, New Hemosol will, in effect,
be the successor to Hemosol's Blood Products Business as it will hold an
approximate 93% interest in, and will be the general partner of, the Blood
Products Partnership, which will own and operate the Blood Products Business
after the Effective Time. The remaining approximate 7% interest in the Blood
Products Partnership will be held by Labco as limited partner.
10
See "New Hemosol After the Arrangement" and "The Blood Products Partnership
After the Arrangement" in this Circular.
LABCO AFTER THE ARRANGEMENT
On the Effective Date, Public Shareholders will hold not less than 52.5% of
the Labco Class A Shares, representing 0.44% of the equity securities of Labco,
and MDS will hold, directly or indirectly, not more than 47.5% of the Labco
Class A Shares and 100% of the Labco Class B Non-Voting Shares, collectively
representing 99.56% of the equity securities and not more than 47.5% of the
voting securities of Labco. New Hemosol will acquire all Labco Class C Shares
under the Plan of Arrangement, which Labco will redeem on the Effective Date for
aggregate redemption proceeds of $16 million in cash and certain additional
consideration.
Following the Arrangement, Labco will retain the Tax Losses and will hold:
- a 99.99% limited partnership interest in the Labs Partnership, which
will own and operate the Labs Business; and
- an approximate 7% limited partnership interest in the Blood Products
Partnership, which will own and operate the Blood Products Business.
Following the completion of the Arrangement, the Labs Partnership will be a
limited partnership, of which 99.99% of the partnership interests will be held
by Labco as limited partner and 0.01% of the partnership interests will be held
by MDS Subco as general partner. The Labs Partnership will own and operate the
Labs Business (excluding the employees and medical directors of the Labs
Business who have either been transferred by MDS to MDS Subco or remain with MDS
as part of its national clinical laboratory services business). MDS will retain
operational control over the Labs Business by virtue of the 0.01% general
partnership interest in the Labs Partnership to be held by MDS Subco, a
wholly-owned subsidiary of MDS.
See "Labco After the Arrangement", "The Blood Products Partnership After
the Arrangement" and "The Labs Partnership After the Arrangement" in this
Circular.
NO DISSENT RIGHTS
The Interim Order does not grant dissent rights to the Securityholders.
Accordingly, the Securityholders will not have any right to dissent and be paid
the fair value of their Hemosol Securities in connection with the Arrangement.
See "The Arrangement -- Court Approval" in this Circular.
RISK FACTORS
In deciding whether to approve the Arrangement, the Securityholders should
consider the risk factors related to the businesses of New Hemosol and Labco and
the holding of Labco Shares. These risk factors are described under "Risk
Factors" in this Circular. See also "Income Tax Considerations" in this
Circular.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
Canadian holders will generally realize neither a capital gain nor a
capital loss on the exchange of Hemosol Shares for Labco Class A Shares and
Labco Class C Shares or on the exchange of Labco Class C Shares for New Hemosol
Shares. See "Income Tax Considerations -- Certain Canadian Federal Income Tax
Considerations".
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
US Holders will likely be treated as receiving a taxable distribution of
New Hemosol Shares from Labco for U.S. federal income tax purposes. If Labco is
treated as having earnings and profits for the taxable year ending October 31,
2004, then the fair market value of the deemed distribution will generally be
taxed as ordinary income to the extent of such earnings and profits. Hemosol
believes that Labco should not have earnings and profits for the taxable year
ending October 31, 2004. However, US Holders should consider the risk that for
the taxable year ending October 31, 2004, Labco may be treated as having
earnings and profits. See "Income Tax Considerations -- Certain United States
Federal Income Tax Considerations" and "Risk Factors -- Risks Relating to Labco
- -- US Holders of Hemosol Shares may be treated as receiving a taxable
distribution from Labco for U.S. federal income tax purposes".
11
SPECIAL FACTORS
For a more detailed description of the matters relating to the (i)
purposes, alternatives, reasons and effects of the Arrangement, (ii) fairness of
the Arrangement and (iii) reports, opinions, appraisals and negotiations
relating to the Arrangement, please see "Special Factors -- Purpose of the
Arrangement", "-- Background to the Arrangement", "-- Alternatives Considered",
"-- Reasons for the Arrangement", "-- Effects of the Arrangement",
"-- Recommendation of the Independent Committee", "-- Recommendation of the
Hemosol Board", "-- KPMG Fairness Opinion", "-- Reasons Why MDS and MDS Subco
Consider the Arrangement to be Fair to Non-MDS Securityholders" and "Draft
Report of PricewaterhouseCoopers LLP".
DISTRIBUTION OF SHARE CERTIFICATES
From the Effective Time to the close of business on the fifth trading day
following the Effective Date, certificates formerly representing Hemosol Shares
will represent only the right to receive New Hemosol Shares and Labco Class A
Shares in accordance with the Arrangement. Following the close of business on
the fifth trading day following the Effective Date, such certificates will cease
to represent any claim or interest, including a claim for dividends or other
distributions against Labco or New Hemosol.
As soon as practicable, certificates representing New Hemosol Shares and
Labco Class A Shares will be mailed to those Shareholders whose names appear on
the register of shareholders at the close of business on the fifth trading day
following the Effective Date.
12
FORWARD-LOOKING STATEMENTS
This Circular contains forward-looking statements relating to the business
and financial outlook of Hemosol/ Labco, New Hemosol, the Blood Products
Partnership and the Labs Partnership which are based on the current
expectations, estimates, forecasts and projections of Hemosol, New Hemosol and
MDS. In some cases, forward-looking statements can be identified by terminology
such as "may", "will", "should", "expects", "plans", "anticipates", "believes",
"estimates", "predicts", "potential" or "continue" or the negative of these
terms or other comparable terminology. These forward-looking statements are not
guarantees of future performance and involve risks, uncertainties, estimates and
assumptions that are difficult to predict. Therefore, actual outcomes and
results may differ materially from those expressed in these forward-looking
statements. The Securityholders should not place undue reliance on any of these
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made, and Hemosol/Labco, New Hemosol, the Blood
Products Partnership and the Labs Partnership undertake no obligation to update
any such statement to reflect new information, the occurrence of future events
or circumstances or otherwise.
A number of important factors could cause actual results to differ
materially from those indicated by the forward-looking statements, including,
but not limited to, the risks described under "Risk Factors" in this Circular.
PRESENTATION OF FINANCIAL INFORMATION
The Audited Financial Statements of Hemosol incorporated by reference in
this Circular and the summary historical financial information for Hemosol based
thereon set out in Annex G of this Circular have been prepared in accordance
with Canadian GAAP, and thus are not comparable in all respects to financial
statements prepared in accordance with United States GAAP. For a discussion of
the principal differences between Canadian GAAP and United States GAAP, see Note
19 to Hemosol's audited consolidated financial statements for the year ended
December 31, 2003, which are incorporated by reference in this Circular.
The summary financial information concerning the Labs Business included in
this Circular under "The Labs Partnership After the Arrangement -- Unaudited
Summary Financial Information Concerning the Labs Business" is unaudited and is
derived from the financial records of MDS that were used to prepare the audited
consolidated statements of financial position of MDS as at October 31, 2003 and
the audited consolidated statements of income of MDS for the fiscal years ended
October 31, 2003, 2002 and 2001.
CURRENCY EXCHANGE RATES
Except where otherwise indicated, all dollar amounts set forth in this
Circular are expressed in Canadian dollars and "$" shall mean Canadian dollars.
The following table sets forth, for the periods indicated, the average, high,
low and end of period closing buying rates in the City of New York for cable
transfers as certified for customs purposes by the Federal Reserve Bank of New
York. Such rates are set forth as U.S. dollars per $1.00 and are the inverse of
rates quoted by the Federal Reserve Bank of New York for Canadian dollars per
US$1.00. On March 10, 2004, the inverse of the closing buying rate was $1.00 per
US$0.7533.
<Table>
<Caption>
YEAR ENDED AVERAGE(1) HIGH LOW PERIOD END
- ---------- ---------- ------ ------ ----------
December 31, 2003.......................................... 0.7205 0.7738 0.6542 0.7738
December 31, 2002.......................................... 0.6370 0.6583 0.6231 0.6329
December 31, 2001.......................................... 0.6446 0.6669 0.6279 0.6279
</Table>
<Table>
<Caption>
MONTH ENDED AVERAGE(2) HIGH LOW PERIOD END
- ----------- ---------- ------ ------ ----------
February 29, 2004.......................................... 0.7524 0.7629 0.7439 0.7460
January 31, 2004........................................... 0.7719 0.7880 0.7496 0.7539
</Table>
- ---------------
Notes:
(1) The average of the exchange rates on the last day of each month during the
applicable year.
(2) The average of the exchange rates for all days during the applicable month.
13
NOTICE REGARDING INFORMATION
The information contained or incorporated by reference in this Circular
(including the information under the heading "Special Factors -- Reasons Why MDS
and MDS Subco Consider the Arrangement to be Fair to Non-MDS Securityholders")
concerning MDS and MDS Subco, their respective directors, officers and
affiliates or the Labs Business is based solely upon information provided to
Hemosol by MDS or upon publicly available information. With respect to this
information, the Hemosol Board has relied exclusively upon MDS, without
independent verification by Hemosol.
Information in this Circular is given as at March 10, 2004 unless otherwise
indicated.
No person is authorized to give any information or make any representation
not contained or incorporated by reference in this Circular and, if given or
made, such information or representation should not be relied upon as having
been authorized. This Circular does not constitute an offer to sell, or a
solicitation of an offer to purchase, any securities, or the solicitation of a
proxy, by any person in any jurisdiction in which such an offer or solicitation
is not authorized or in which the person making such offer or solicitation is
not qualified to do so or to any person to whom it is unlawful to make such an
offer or solicitation of an offer or proxy solicitation. Neither delivery of
this Circular nor any distribution of the securities referred to in this
Circular will, under any circumstances, create an implication that there has
been no change in the information set forth herein since the date of this
Circular.
14
SPECIAL FACTORS
PURPOSE OF THE ARRANGEMENT
Hemosol's ability to continue as a going concern is dependent on its
ability to secure financing or to generate revenues in order to be able to
continue its development activities and successfully bring its products to
market. On January 31, 2004, Hemosol had approximately $7.1 million in cash and
cash equivalents. Hemosol has fully drawn down all amounts available under the
Bank Loan. As a result of cost savings plans implemented in June 2002 and April
2003, Hemosol's average monthly cash burn-rate has been reduced to approximately
$1.2 million. Hemosol estimates that existing financial resources will not be
sufficient to allow it to continue its development activities after June 2004
unless additional financing is obtained.
The purpose of the Arrangement is to provide a $16 million cash infusion
into the Blood Products Business through the utilization of Hemosol's existing
and unutilized Tax Losses. Hemosol has accumulated a significant amount of Tax
Losses from its research and development activities to date and does not expect
to be able to generate sufficient revenues from the Blood Products Business in
the near term to utilize such losses.
BACKGROUND TO THE ARRANGEMENT
Hemosol is a biopharmaceutical company focused on the discovery,
development and manufacture of products based on human blood proteins. Hemosol
has a range of products in development, including its principal oxygen
therapeutic product, HEMOLINK. Hemosol is also developing additional
therapeutics and a hemoglobin-based delivery platform to treat diseases such as
hepatitis C and cancers of the liver, as well as a cell therapy initially
directed to the treatment of cancer through its cell expansion and stem cell
research activities. In addition to the products currently under development,
Hemosol intends to use its state-of-the-art Hemolink Building to produce
valuable therapeutic plasma-based proteins pursuant to the recently announced
strategic alliance with ProMetic.
As Hemosol's operations to date have been focused on research and
development activities, Hemosol has had losses from operations for each fiscal
year since its inception in 1985. As a result, Hemosol has accumulated a
significant amount of Tax Losses which it is currently unable to utilize.
MDS is the largest health and life sciences company in Canada with
consolidated revenues for the fiscal year ended October 31, 2003 of $1.8
billion. MDS, through its operating divisions, is involved in a variety of
businesses related to the health and life sciences industry, including:
laboratory testing, imaging agents for nuclear medicine testing, sterilization
systems for medical and consumer products, research services for discovery and
development of drugs, analytical instruments to assist in the development of new
drugs, medical/surgical supplies and proteomics-enabled drug discovery
technology. As MDS and its affiliates (as such term is defined in the U.S.
Exchange Act) own approximately 11.7% of the outstanding Hemosol Shares and four
members of the current Hemosol Board are directors, officers or employees of MDS
or affiliates thereof, MDS is a related party of Hemosol for the purposes of
Rule 61-501 and Policy Q-27 and may be deemed to be an affiliate of Hemosol for
the purposes of Rule 13e-3 under the U.S. Exchange Act. In addition, as MDS
Subco and Hemosol may each be controlled (as such term is defined in the U.S.
Exchange Act) by MDS, MDS Subco may be deemed an affiliate of Hemosol for the
purposes of Rule 13e-3 under the U.S. Exchange Act.
In September 2003, MDS approached Hemosol with a proposal for the
Arrangement. CCRA issued the Tax Ruling on September 23, 2003, as supplemented
on February 5, 2004, which sets out the steps for the restructuring of Hemosol
and the Labs Business that would allow the Tax Losses to be utilized against
income from the Labs Business. The steps of the reorganization of the Blood
Products Business and the Labs Business as set out in the Tax Ruling are
reflected in the transactions contemplated under the Arrangement.
On September 17, 2003, the Hemosol Board formed the Independent Committee
for the purpose of evaluating the Arrangement, overseeing the negotiations of
the terms of the Arrangement and making a recommendation to the Hemosol Board as
to whether the Arrangement is in the best interests of Hemosol and whether it is
fair, from a financial point of view, to Non-MDS Securityholders. The
Independent Committee is comprised of three directors who are not related to MDS
or its affiliates and who are not employees of Hemosol, namely Mitchell J.
Kostuch, George W. Masters and Edward E. McCormack.
On September 25, 2003, the Independent Committee met with E&Y, auditors and
tax advisors to Hemosol, to discuss the structure of the Arrangement on a
preliminary basis. E&Y are also the auditors and tax advisors of MDS.
15
On October 31, 2003, Hemosol and MDS executed the Letter of Understanding
setting out the understanding between Hemosol and MDS regarding the Arrangement
and referring to a cash infusion into the Blood Products Business within a range
of $10 to $15 million, subject to negotiation. The Letter of Understanding was
non-binding except for certain provisions relating to confidentiality and the
agreement of Hemosol to negotiate exclusively with MDS with respect to any
transaction involving the Tax Losses for a specified period of time.
During November 2003, MDS conducted due diligence in respect of the Tax
Losses and the Blood Products Business and Hemosol conducted due diligence in
respect of the Labs Business. On November 24, 2003, KPMG was engaged to provide
financial advisory services to the Independent Committee, including an opinion
as to the fairness of the Arrangement, from a financial point of view, to
Non-MDS Securityholders.
On December 2, 2003, the Independent Committee held a conference call with
KPMG and E&Y, with DWPV, Hemosol's legal advisors, and with representatives of
Hemosol's management (none of whom is related to MDS or its affiliates or is
otherwise a director, officer or employee of MDS). DWPV provided an overview of
the duties and obligations of the Independent Committee and KPMG confirmed the
terms of its engagement.
On December 9, 2003, the Independent Committee met with DWPV, KPMG, E&Y and
representatives of Hemosol's management. KPMG and management presented the
detailed structure of the Arrangement and an analysis of the value of the
consideration to be exchanged under the Arrangement and management provided an
update as to preliminary value discussions with MDS. The Independent Committee
and management discussed negotiation strategy and process and the Independent
Committee provided guidance to management as to such matters. The Independent
Committee and management also discussed alternative ways to raise financing for
Hemosol. The Independent Committee then held a meeting in camera with DWPV and
KPMG at which KPMG discussed with the Independent Committee the issues to be
considered in the negotiation of the various value transfers involved in the
Arrangement.
On December 19, 2003, management of Hemosol provided an update to the
Independent Committee as to the status of the continuing negotiations with MDS.
Management introduced the concept of the Surrendered Warrants pursuant to which
MDS would surrender a certain number of its Tranche A Warrants and its right to
receive a certain number of its Tranche B Warrants as an alternative way for MDS
to contribute consideration to the proposed transaction. Management and KPMG
presented to the Independent Committee a methodology to value the Surrendered
Warrants. Following a detailed discussion and consultation with KPMG and E&Y,
the Independent Committee provided management with a range of financial
parameters within which management was authorized to carry out the negotiations.
On February 11, 2004, the Independent Committee met with DWPV, KPMG and
management of Hemosol. Representatives of Hemosol's management and DWPV
presented the terms of the Arrangement. Following such presentations, KPMG
discussed in detail with the Independent Committee each element of its analysis
in reaching the conclusions in the KPMG Fairness Opinion. KPMG delivered its
opinion that, as of February 11, 2004, the Arrangement is fair, from a financial
point of view, to Non-MDS Securityholders (see "-- KPMG Fairness Opinion"
below). After consideration of the advice from KPMG, the Independent Committee
unanimously determined that the Arrangement is in Hemosol's best interests and
is fair, from a financial point of view, to Non-MDS Securityholders. The
Independent Committee unanimously approved its report to the Hemosol Board and
resolved to recommend the approval of the Arrangement to the Hemosol Board.
Later on February 11, 2004, the Hemosol Board met to consider the Arrangement.
After careful consideration of the report of the Independent Committee and the
Independent Committee's conclusions, the KPMG Fairness Opinion and the other
factors considered and relied upon by the Independent Committee, the Hemosol
Board determined that the Arrangement is in the best interests of Hemosol and is
fair, from a financial point of view, to Non-MDS Securityholders, and
unanimously (excluding four directors who are related to MDS, each of whom
abstained from voting in accordance with the OBCA) approved the Arrangement. See
"-- Recommendation of the Independent Committee" and "-- Recommendation of the
Hemosol Board" below.
On February 11, 2004, Hemosol and MDS entered into the Arrangement
Agreement and a press release was issued by each of Hemosol and MDS on the
morning of February 12, 2004.
All of the terms of the Arrangement, including the aggregate consideration
therefor, such consideration consisting of the cash infusion of $16 million into
the Blood Products Business, the surrender of the Surrendered Warrants, the
indirect transfer of approximately 7% of the equity interest in the Blood
Products Business to Labco
16
and the indirect transfer of approximately 0.44% of the equity interest of the
Labs Business to Public Shareholders, were determined and negotiated by
Hemosol's management under the supervision of the Independent Committee.
ALTERNATIVES CONSIDERED
During the period between August and October 2003, Hemosol received a
number of expressions of interest involving the Tax Losses, including an
expression of interest provided by MDS in September 2003. Hemosol received two
non-binding written proposals for transactions involving the Tax Losses from
parties other than MDS.
The first proposal was for a reorganization of Hemosol involving the
transfer of the Blood Products Business (together with $6 million funded by the
principals of the proposed transaction) to a new entity in which Shareholders
would receive an equivalent pro rata equity interest. Shareholders would
continue with a 20% equity interest in Hemosol (which would receive $2 million
from the principals of the proposed transaction) and Hemosol would seek to
acquire businesses to utilize the Tax Losses. The second proposal involved the
distribution of the Blood Products Business to the Shareholders (after an
approximate $3 million cash infusion funded by the principals of the proposed
transaction). Shareholders would continue with a 5% equity interest in Hemosol
and Hemosol would seek to acquire businesses to utilize the Tax Losses.
Hemosol did not pursue such proposals, as they involved cash infusions into
the Blood Products Business that were significantly below the range of $10
million to $15 million referred to in the Letter of Understanding and, in
Hemosol's view, the likelihood of the successful completion of such proposals
was below that of the proposal from MDS, particularly in light of MDS having
obtained the Tax Ruling.
In addition, Hemosol has been considering alternative transactions to
improve its financial position. On November 28, 2003, Hemosol completed the
Special Warrant Offering (as defined and discussed in "Hemosol Prior to the
Arrangement -- Special Warrant Offering") which raised gross proceeds of
$5,881,350. Although the proceeds from the Special Warrant Offering helped
improve its financial condition, Hemosol requires additional resources to
continue the development of HEMOLINK and its other product candidates and to
implement the recently announced alliance with ProMetic. Hemosol believes that
the Arrangement represents an alternative to equity financing that is
considerably less dilutive than and avoids the other limitations of raising
equity capital.
REASONS FOR THE ARRANGEMENT
The Arrangement provides Hemosol with the opportunity to raise cash for the
Blood Products Business in a manner that is considerably less dilutive than, and
avoids the other limitations of, raising equity capital and will allow New
Hemosol to continue the development of HEMOLINK and the other product candidates
of Hemosol and to advance the implementation of the recently announced alliance
with ProMetic.
Although New Hemosol will not have the future benefit of applying the Tax
Losses against income, it is expected that the Blood Products Partnership will
not be able to generate sufficient revenues from the Blood Products Business in
the near term to utilize such Tax Losses and that it will continue to generate
additional tax losses until it is able to commercialize HEMOLINK and/or one or
more of its other product candidates or generate revenues from the utilization
of the Hemolink Building. In addition, the Blood Products Partnership will have
the ability to utilize the undepreciated capital cost of the Blood Products
Assets against future income.
EFFECTS OF THE ARRANGEMENT
IF THE ARRANGEMENT IS NOT EFFECTED
If the Arrangement is not effected, Hemosol intends to continue operating
the Blood Products Business. However, Hemosol's ability to continue as a going
concern will be dependent on its ability to secure additional financing. See
"Risk Factors -- Risks Relating to the Blood Products Partnership".
BENEFITS AND DETRIMENTS TO HEMOSOL'S BLOOD PRODUCTS BUSINESS AND PUBLIC
SHAREHOLDERS
The Arrangement will result in the following benefits to Hemosol's Blood
Products Business and Public Shareholders:
- the Blood Products Business will receive a cash infusion of $16 million
and Public Shareholders will have the same shareholdings in New Hemosol
(which will own approximately 93% of the equity interest in the Blood
Products Partnership) that they currently have in Hemosol;
17
- Public Shareholders will indirectly receive, in the aggregate,
approximately 0.44% of the equity of the Labs Business (through their
ownership of not less than 52.5% of the Labco Class A Shares); and
- MDS will surrender the Surrendered Warrants.
The Arrangement will result in the following detriments to the Public
Shareholders:
- approximately 7% of the equity interest in the Blood Products Business
(of which Shareholders, including MDS, currently own 100%) will, in
effect, be transferred to Labco, of which MDS will own 99.56% of the
equity;
- neither New Hemosol nor the Blood Products Business will have the
benefit of applying the Tax Losses against income in the future;
- the Public Shareholders will not be entitled to participate in the first
$16 million of profits of the Labs Partnership following the Arrangement
because such profits will be used to retire the $16 million loan made by
MDS to the Labs Partnership to fund the cash infusion to the Blood
Products Business;
- the Blood Products Business will be carried on through a limited
partnership resulting in additional administrative expense and the
requirement to seek the approval of Labco, as a limited partner, for
certain matters; and
- US Holders will likely be treated as receiving a taxable distribution of
New Hemosol Shares from Labco for U.S. federal income tax purposes. This
deemed distribution may result in US Holders incurring U.S. federal
income tax liability. See "Income Tax Considerations -- Certain United
States Federal Income Tax Considerations".
BENEFITS AND DETRIMENTS TO MDS AND MDS SUBCO
The Arrangement will result in the following benefits to MDS and MDS Subco:
- the Tax Losses will be utilized against income generated by the Labs
Business, following which MDS will be entitled to approximately 99.56%
of such after-tax income through dividends or other distributions on the
Labco Class A Shares and the Labco Class B Non-Voting Shares (through
its ownership of 99.56% of the equity of Labco), after the $16 million
loan made by MDS to the Labs Partnership is retired;
- approximately 7% of the equity interest in the Blood Products Business
(of which Shareholders, including MDS, currently own 100%) will, in
effect, be transferred to Labco, of which MDS will own 99.56% of the
equity;
- based on the audited consolidated financial statements of Hemosol for
the year ended December 31, 2003 incorporated by reference in this
Circular, MDS's 11.7% equity interest in Hemosol as of such date
represented a net book value of approximately $9 million and a net loss
of approximately $4.1 million. Upon completion of the Arrangement, MDS
will hold, directly or indirectly, an 11.7% equity interest in New
Hemosol (which will own approximately 93% of the equity interest in the
Blood Products Partnership) (assuming current shareholdings remain
constant) and a 99.56% equity interest in Labco (which will own
approximately 7% of the equity interest in the Blood Products
Partnership and 99.99% of the equity interest in the Labs Partnership).
In addition, through its wholly-owned subsidiary, MDS Subco, MDS will
own 0.01% of the equity interest in the Labs Partnership. As a result,
MDS will own (i) 17.85% of the net book value and net loss of the Blood
Products Partnership which, based on the audited consolidated financial
statements of Hemosol for the year ended December 31, 2003, would have
been $13.74 million and $6.24 million, respectively, and (ii) 99.56% of
the net book value and net income of the Labs Partnership which, based
on the unaudited summary financial information for the Labs Business for
the year ended October 31, 2003, would have been $33.4 million and $47.4
million, respectively (see "The Labs Business After the Arrangement --
Unaudited Summary Financial Information Concerning the Labs Business");
and
- MDS Subco will hold a 0.01% general partnership interest in the Labs
Partnership.
The Arrangement will result in the following detriments to MDS:
- $16 million of the revenues from the Labs Business (to which MDS is
currently 100% entitled) will be used to fund the $16 million cash
infusion into the Blood Products Business;
18
- MDS will indirectly transfer approximately 0.44% of the equity of the
Labs Business to Public Shareholders (through their ownership of not
less than 52.5% of the Labco Class A Shares);
- MDS will surrender the Surrendered Warrants;
- the Labs Business will be carried on through a limited partnership
resulting in additional administrative expense and the requirement to
seek the approval of Labco, as a limited partner, for certain matters;
- MDS will hold not more than 47.5% of the voting shares of Labco despite
owning 99.56% of the equity of Labco; and
- the Labs Business will be exposed to pre-existing liabilities of Hemosol
to the extent that they are not satisfied by the Blood Products
Partnership directly or pursuant to the Labco Indemnity Agreement.
In addition, as an 11.7% shareholder of Hemosol (assuming that current
shareholdings in Hemosol remain constant), MDS will also participate in the
benefits and detriments to the Public Shareholders discussed under "-- Benefits
and Detriments to Hemosol's Blood Products Business and Public Shareholders"
above.
RECOMMENDATION OF THE INDEPENDENT COMMITTEE
On September 17, 2003, the Hemosol Board formed the Independent Committee
for the purpose of evaluating the Arrangement, overseeing the negotiations of
the terms of the Arrangement and making a recommendation to the Hemosol Board as
to whether the Arrangement is in the best interests of Hemosol and whether it is
fair, from a financial point of view, to Non-MDS Securityholders. The
Independent Committee is comprised of three directors who are not related to MDS
or its affiliates, who are not employees of Hemosol and who are independent for
the purposes of Rule 61-501 and Policy Q-27, namely Mitchell J. Kostuch, George
W. Masters and Edward E. McCormack.
On February 11, 2004, the Independent Committee unanimously concluded that
the Arrangement is fair, from a financial point of view, to Non-MDS
Securityholders and is in the best interests of Hemosol and recommended that the
Hemosol Board approve the Arrangement. In reaching such conclusions, the
Independent Committee obtained the advice of DWPV and KPMG, completed a detailed
examination of the process leading to the execution of the Arrangement
Agreement, examined the terms and conditions of the Arrangement, the Arrangement
Agreement and the KPMG Fairness Opinion, had discussions with Hemosol's senior
management with respect to, among other things, the business, assets, financial
condition and prospects of Hemosol, reviewed the information provided in
connection with the Arrangement, had discussions with the professional advisors
to Hemosol and examined all other documents and information that the Independent
Committee, DWPV and KPMG considered relevant to review. The Independent
Committee regularly consulted with DWPV and KPMG during the course of its
evaluation of the Arrangement. The Independent Committee believes that the
analysis performed by KPMG in connection with rendering the KPMG Fairness
Opinion is reasonable. In reaching its conclusions, the Independent Committee
considered and relied upon, among other things, the following:
- KPMG's conclusion in the KPMG Fairness Opinion that, as at February 11,
2004, the Arrangement is fair, from a financial point of view, to
Non-MDS Securityholders;
- the fact that New Hemosol will receive cash proceeds of $16 million and
the other terms, conditions and structure of the Arrangement;
- the quantum of the Tax Losses, the limited number of companies and
businesses capable of benefiting from such quantum of Tax Losses in a
single transaction and the transaction costs and uncertainty involved in
carrying out more than one transaction;
- the Arrangement allows Shareholders to continue with a pro rata equity
interest in New Hemosol, the effective successor to the Blood Products
Business, that will be substantially equivalent to their pro rata
interest in Hemosol immediately prior to the Arrangement;
- the Hemosol Board's ability under the Arrangement Agreement to respond,
if required in accordance with its fiduciary duties, to any unsolicited
proposal by a third party that would, if consummated in accordance with
its terms, result in a transaction that would be superior to the
Arrangement;
- the fact that interested third parties would not, as a result of the
Arrangement Agreement, be precluded from subsequently proposing a more
favourable transaction, provided that Hemosol would be required to
19
pay an expense reimbursement in the event that it terminated the
Arrangement Agreement in favour of an agreement with a third party;
- the condition that, in order to be effective, the Arrangement must be
approved by two-thirds of the votes cast at the Meeting by
Securityholders and by a majority of the votes cast at the Meeting by
Minority Shareholders, and must also be approved by the Court which will
determine the fairness of the Arrangement;
- Hemosol's business, assets, financial condition and future prospects,
including its current financial condition;
- Hemosol's senior management's view that the Arrangement is in the best
interests of Hemosol;
- the financing alternatives that are reasonably available to Hemosol,
including an assessment of potential alternative transactions of a
similar nature with other parties and certain expressions of interest
from third parties made to management prior to the entering into of the
Letter of Understanding, each of which was financially inferior to the
Arrangement;
- the likelihood of the successful completion of the Arrangement,
particularly in light of MDS having obtained the Tax Ruling; and
- as the Arrangement will likely be treated as a taxable distribution of
New Hemosol Shares by Labco for U.S. federal income tax purposes (see
"Income Tax Considerations -- Certain United States Federal Income Tax
Considerations"), the fact that the Arrangement has been structured to
minimize the portion of such distribution that is taxable to US Holders.
The foregoing discussion of the information and factors considered and
evaluated by the Independent Committee is not intended to be exhaustive, but is
intended to include all material factors considered by the Independent
Committee. The Independent Committee believes that the foregoing factors and the
Independent Committee's active involvement in overseeing the arm's length
negotiations with MDS adequately support the Independent Committee's belief as
to the substantive fairness of the Arrangement to Non-MDS Securityholders. The
Independent Committee's belief as to the substantive fairness of the Arrangement
to Non-MDS Securityholders was not based upon any of the following, as it did
not believe they were relevant in the circumstances: the net book value of the
Hemosol Shares, the liquidation value of Hemosol, the purchase prices previously
paid by MDS or its affiliates for Hemosol Shares and the substance of the PwC
Draft Report described under "Special Factors -- Reasons Why MDS and MDS Subco
Consider the Arrangement to be Fair to Non-MDS Securityholders" and "-- Draft
Report of PricewaterhouseCoopers LLP". Hemosol has not received any firm offer
from any unaffiliated person during the past two years for any merger or
consolidation of Hemosol, the sale or other transfer of all or any substantial
part of the assets of Hemosol, or any purchase of Hemosol's securities that
would enable the purchaser to exercise control over Hemosol.
In addition, in light of the number and variety of factors considered by
the Independent Committee in connection with its evaluation of the fairness of
the Arrangement, the Independent Committee does not find it practicable to
assign relative weights to the foregoing factors and, accordingly, did not do
so.
RECOMMENDATION OF THE HEMOSOL BOARD
After careful consideration of the Independent Committee's report and
conclusions, the KPMG Fairness Opinion and the other factors considered and
relied upon by the Independent Committee, the Hemosol Board (none of the
directors of which, with the exception of Hemosol's chief executive officer, is
an employee of Hemosol) unanimously (excluding R. Ian Lennox, Wilfred G. Lewitt,
Edward K. Rygiel and Nelson M. Sims who are related to MDS, each of whom
abstained from voting pursuant to the OBCA) determined that the Arrangement is
in the best interests of Hemosol and is fair, from a financial point of view, to
Non-MDS Securityholders and resolved to recommend that Securityholders vote in
favour of the Arrangement Resolution.
In reaching its conclusion that the Arrangement is in the best interests of
Hemosol and is fair, from a financial point of view, to Non-MDS Securityholders
and its recommendation that Securityholders vote in favour of the
20
Arrangement Resolution, the Hemosol Board considered information with respect to
the business and affairs of Hemosol, as well as the following factors:
- the factors considered and relied upon by the Independent Committee;
- the unanimous recommendation of the Arrangement by the Independent
Committee;
- the fact that the Independent Committee consisted of independent and
disinterested directors appointed to represent the interests of Non-MDS
Securityholders; and
- the fact that the Independent Committee retained and was advised by
KPMG, as independent financial advisor, and by DWPV, as outside legal
counsel.
This discussion of the information and factors considered and evaluated by
the Hemosol Board is not intended to be exhaustive but is believed to include
all material factors considered by the Hemosol Board. In addition, in light of
the number and variety of factors considered by the Hemosol Board in connection
with its evaluation of the fairness of the Arrangement, the Hemosol Board does
not find it practicable to assign relative weights to the foregoing factors and,
accordingly, did not do so.
THE HEMOSOL BOARD RECOMMENDS THAT SECURITYHOLDERS VOTE IN FAVOUR OF THE
ARRANGEMENT RESOLUTION.
KPMG FAIRNESS OPINION
The Independent Committee retained KPMG to provide financial advisory
services and a fairness opinion in connection with the Arrangement. KPMG was
engaged by the Independent Committee upon the recommendation of management of
Hemosol which considered, as part of the process of the selection of a financial
advisor, factors such as expertise, cost and potential conflicts. KPMG was not
engaged to prepare and did not prepare a formal valuation of Hemosol, New
Hemosol, Labco, the Blood Products Business or the Labs Business or any of their
securities or assets and the KPMG Fairness Opinion should not be construed as a
formal valuation of such entities or their securities or assets.
KPMG is one of the world's largest professional services organizations,
offering a broad range of services. KPMG's professionals have significant
experience in advising a broad range of companies for various purposes,
including securities law compliance, fairness opinions, mergers and
acquisitions, corporate income tax, and litigation matters, among other things.
KPMG is not an insider, associate or affiliate of Hemosol or MDS. Neither KPMG
nor any of its affiliates is an advisor to MDS in respect of the Arrangement.
KPMG has not been engaged within the last two years to perform financial
advisory, tax or other services for, or been involved in a prior valuation,
appraisal or review of the financial status of Hemosol or MDS, other than
pursuant to this engagement. Accordingly, the Independent Committee was
satisfied that KPMG was qualified and competent to provide such services and was
independent of MDS and its affiliates, including for the purposes of Rule 61-501
and Policy Q-27.
Hemosol and KPMG entered into a formal engagement agreement dated November
24, 2003. The terms of the engagement agreement provide that KPMG is to be paid
fees for its services as financial advisor to the Independent Committee. In
addition, KPMG is to be reimbursed for administration expenses and other
disbursements and indemnified by Hemosol in certain circumstances. The fees
payable to KPMG under its engagement agreement are not contingent in whole or in
part upon the success of the Arrangement and KPMG has no material financial
interest in Hemosol or MDS that may be affected by the success of the
Arrangement.
At the meeting of the Independent Committee on February 11, 2004, KPMG
orally set out its conclusions regarding the matters dealt with in the KPMG
Fairness Opinion (which were ultimately set out in the KPMG Fairness Opinion)
and the financial analysis underlying its conclusions. All members of the
Independent Committee were present at the meeting on February 11, 2004 and had
an opportunity to ask questions regarding KPMG's presentation. KPMG has
concluded that, as of February 11, 2004, and subject to the various assumptions,
limitations and qualifications set out in the KPMG Fairness Opinion, the
Arrangement is fair, from a financial point of view, to Non-MDS Securityholders.
The full text of the KPMG Fairness Opinion, which sets out the assumptions
made, matters considered, limitations of the review undertaken and various
qualifications in connection with the KPMG Fairness Opinion is attached as Annex
E to this Circular and is also filed as an exhibit to the Schedule 13E-3 filed
by Hemosol, MDS and MDS Subco with the SEC pursuant to the requirements of the
U.S. Exchange Act. The KPMG Fairness Opinion is addressed to the Hemosol Board
for its use in connection with its evaluation of the Arrangement, and is
21
not intended to be, and does not constitute, a recommendation to any
Securityholder as to how such Securityholder should vote with respect to the
Arrangement Resolution.
The Fairness Opinion states that it may not be used by any person or relied
upon by any person, other than the Independent Committee or the Hemosol Board,
without the prior written consent of KPMG. KPMG has expressly disclaimed any
liability by reason of the use of the Fairness Opinion by any person other than
the Independent Committee or the Hemosol Board. Whether or not the Fairness
Opinion could be relied upon by any Securityholder to support a claim against
KPMG is an issue that, if asserted, would be resolved by a court of competent
jurisdiction. The resolution of such issue would have no effect on the rights
and responsibilities of the Independent Committee or the Hemosol Board under
applicable Canadian or United States law, and the availability or non-
availability of a defence would have no effect on the rights or responsibilities
of the Independent Committee, the Hemosol Board or KPMG under applicable United
States federal securities law.
The summary of the KPMG Fairness Opinion contained herein is qualified in
its entirety by reference to the full text of the KPMG Fairness Opinion.
Securityholders are urged to read the KPMG Fairness Opinion carefully and in its
entirety.
In preparing the KPMG Fairness Opinion, KPMG considered such factors and
conducted such analyses, investigations, research and testing of assumptions as
were deemed by it to be appropriate in the circumstances. KPMG relied upon and
assumed the completeness, accuracy and fair presentation of all financial and
other information, data, advice, opinions, representations and other material
obtained by it from public sources or provided to it by, on behalf of or at the
request of the Independent Committee, Hemosol or MDS, and the KPMG Fairness
Opinion is conditional upon such completeness, accuracy and fair presentation.
KPMG has assumed that the projections provided to it by management of Hemosol
and/or MDS represent the best estimate of the most probable results for the
Blood Products Business or the Labs Business for the periods presented therein.
Senior officers of Hemosol have represented to KPMG that, among other things, no
changes have occurred in the material facts set out or referred to in any such
information subsequent to the date that such information was provided which
would have or which could reasonably be expected to have a material adverse
effect on the KPMG Fairness Opinion and that there are no material facts about
Hemosol not contained in or referred to in the information provided to KPMG by
Hemosol in connection with the KPMG Fairness Opinion which could reasonably be
expected to affect materially the assumptions used, the procedures adopted and
the scope of the review undertaken by KPMG in providing its services and in
rendering the KPMG Fairness Opinion.
In preparing the KPMG Fairness Opinion, KPMG reviewed, considered and
relied upon, among other things, the following:
- the Arrangement Agreement and the agreements or other documents attached
as Exhibits thereto, including the Plan of Arrangement, the Blood
Products Partnership Agreement, the Labs Partnership Agreement and the
Labs Management Agreement;
- the financial statements of Hemosol, including the audited consolidated
balance sheets, statements of loss and deficit and cash flow statements
as at and for the fiscal years ended December 31, 2001 and 2002, the
unaudited consolidated balance sheet, statement of loss and deficit and
cash flow statement as at and for the nine-month period ended September
30, 2003;
- other publicly available information concerning Hemosol, including the
Annual Information Form dated May 27, 2003, the 2002 Annual Report to
Shareholders, the Management Information Circular dated December 22,
2003 and the Short-Form Prospectus dated January 13, 2004;
- income tax returns of Hemosol and schedules prepared by management of
Hemosol summarizing the nature and estimated amount of tax attributes of
Hemosol as at December 31, 2003;
- Hemosol's management's financial projections of EBITDA, capital
expenditures and licence payments for the years ending December 31, 2004
through 2010;
- reported prices and trading activity for the Hemosol Shares;
- discussions with representatives of senior management of Hemosol with
respect to the current operations and future prospects of the Blood
Products Business;
- expressions of interest which Hemosol received regarding transactions
designed to allow Hemosol to benefit from the value of the Tax Losses;
22
- publicly available information concerning MDS, including the Annual
Information Form dated January 31, 2003 and the 2002 Annual Report to
MDS's shareholders;
- unaudited summary financial information for the Labs Business provided
by MDS, including a balance sheet as at October 31, 2003 and operating
results for the years ending October 31, 1999 to 2003 and projected
operating results for the year ending October 31, 2004;
- certain public stock market and financial data for publicly traded
companies with operations comparable to the Labs Business;
- discussions with representatives of senior management of MDS with
respect to the current operations and future prospects of the Labs
Business;
- discussions with the legal and tax advisors to Hemosol in respect of the
financial and tax impacts of the Arrangement to Non-MDS Securityholders;
- review of transactions involving tax attributes, including those
publicly announced and other non-public transactions in which KPMG
advised; and
- general industry and economic information obtained from other sources
considered reliable and necessary by KPMG in the circumstances.
The following is a summary of the material financial analyses used by KPMG
in connection with providing the KPMG Fairness Opinion to the Independent
Committee and the Hemosol Board.
KPMG believes that the assessment of fairness from a financial point of
view must be determined in the context of each particular transaction. KPMG has
based the KPMG Fairness Opinion on methods and techniques that KPMG considered
appropriate in the circumstances and considered a number of factors in its
review of the Arrangement. The preparation of a fairness opinion is a complex
process and it is not necessarily susceptible to partial analysis or a summary
description. Accordingly, KPMG's analyses must be considered as a whole and the
selection of portions of KPMG's analyses or the factors considered by KPMG,
without considering all factors and analyses together, could create a misleading
view of the approaches underlying the KPMG Fairness Opinion.
In order to assess the fairness of the Arrangement from a financial point
of view to Non-MDS Securityholders, KPMG reviewed and considered the estimated
value of each constituent component to be transferred and/or conveyed as part of
the overall Arrangement using procedures and approaches which it considered
appropriate and acceptable in the circumstances based on the financial and other
information as available or as provided by either Hemosol or MDS. In particular,
KPMG assessed the value of the following constituent components of the
Arrangement: (i) the Labco Class A Shares to be distributed to Shareholders;
(ii) the Surrendered Warrants; (iii) the 7% limited partnership interest in the
Blood Products Business to be held by Labco, in which MDS will own 99.56% of the
equity; and (iv) the Tax Losses.
VALUE OF LABCO CLASS A SHARES
In assessing the estimated value of the Labco Class A Shares to be
distributed to Shareholders pursuant to the Arrangement, KPMG was of the view
that the capitalized EBITDA approach to the valuation of Labco would be
appropriate as the primary business of Labco (being the Labs Business) would
involve revenues and expenses that are relatively predictable and constant.
EBITDA is a non-GAAP measure and should not be considered an alternative to any
other measure of performance presented in accordance with GAAP. EBITDA, as used
by MDS in its projections relating to the Labs Business provided to KPMG, is not
necessarily comparable with similarly titled measures of other companies because
not all companies calculate EBITDA in the same fashion.
Based on information provided to KPMG by MDS, after normalization
adjustments and the inclusion of expected additional expenses resulting from the
reorganization of the Labs Business contemplated by the Arrangement, EBITDA for
the Labs Business has been in the range of approximately $46 million to $48
million per fiscal year during the fiscal years ended October 31, 2001 to 2003
and is projected to be approximately $45 million for the fiscal year ending
October 31, 2004. The qualifications in respect of projections for Hemosol under
"-- Management Projections" below apply equally to such projection for the Labs
Business.
23
KPMG reviewed the public stock market trading multiples as of January 21,
2004 for the companies listed in the table below that have operations comparable
to the Labs Business and selected an EBITDA multiple range of 10.5x to 11.0x.
<Table>
<Caption>
EBITDA
AS OF JANUARY 21, 2004 (TRAILING TWELVE MONTHS)
-------------------------------- ------------------------
COMPANY TRADING PRICE ENTERPRISE VALUE AMOUNT MULTIPLE
- ------- ------------- ---------------- ------------- --------
(In millions) (In millions)
MDS Inc.......................................... $20.65 $3,260.6 $310.0 10.5x
CML Healthcare Inc............................... $51.70 $1,088.9 $ 77.6 14.0x
Covance Inc...................................... US$28.43 US$1,646.0 US$159.4 10.3x
LabOne Inc....................................... US$35.13 US$ 538.0 US$ 45.5 11.8x
Laboratory Corp. of America...................... US$40.76 US$6,708.2 US$624.9 10.7x
Quest Diagnostics................................ US$78.01 US$9,123.1 US$889.2 10.3x
</Table>
Based on a normalized EBITDA of $45 million for the Labs Business and a
range of EBITDA multiples of 10.5x to 11.0x, KPMG arrived at an indicative value
for Labco in the range of $472.5 million to $495 million, exclusive of the net
present value of the Tax Losses to Labco. Including the net present value of the
Tax Losses (based on estimated pre-tax profitability of Labco in the order of
$41 million per year and a discount rate of 10%) of $95 million in the value of
Labco resulted in an indicative value for Labco in the range of $567.5 million
to $590 million, resulting in an indicative value in the range of $2.838 million
to $2.95 million for the 0.5% equity interest in Labco that the Labco Class A
Shares to be distributed to Shareholders will represent.
VALUE OF SURRENDERED WARRANTS
In assessing the value of the Surrendered Warrants to be surrendered by MDS
pursuant to the Arrangement, KPMG considered the intrinsic value of the
Surrendered Warrants and the value of the Surrendered Warrants implied by the
application of the Black-Scholes option pricing model.
Using the Black-Scholes option pricing model adjusted to account for the
dilutive impact of the Surrendered Warrants and assuming a price per Hemosol
Share of $1.60 and volatility of 100%, KPMG determined the indicative value of
the Surrendered Warrants to be $1.18 per Surrendered Warrant for an aggregate
indicative value of $2.9 million for the Surrendered Warrants.
VALUE OF BLOOD PRODUCTS BUSINESS
In assessing the value of the approximate 7% limited partnership interest
in the Blood Products Business to be retained by Labco pursuant to the
Arrangement, KPMG considered a discounted cash flow analysis and a market
capitalization analysis. A public market analysis was also considered by KPMG,
but not employed since it was determined that there were no public companies
comparable to the Blood Products Business.
Discounted Cash Flow Analysis
The discounted cash flow (also referred to as "DCF") analysis provided a
net present value of the projected after-tax free cash flows of the Blood
Products Business based on the following:
- EBITDA, capital expenditures and licence payment projections prepared by
Hemosol's management for the years ending December 31, 2004 through 2010
(see "-- Management Projections" below);
- future expected cash taxes projected by KPMG based on (i) Hemosol's
management's projections referred to above, (ii) an assumption that $80
million of undepreciated capital cost would remain with the Blood
Products Business and (iii) an income tax rate of 36%;
- future expected working capital requirements projected by KPMG based on
(i) Hemosol's management's projections referred to above and (ii)
assumed days sales outstanding and days expenses outstanding of 30 days;
- a terminal growth rate of 2.5% (used in the calculation of the terminal
value);
- a discount rate in the range of 30% to 35%;
24
- the value of certain product candidates of Hemosol and redundant assets
not included in management's projections of approximately $7.5 million;
- the $16 million cash infusion to the Blood Products Business resulting
from the Arrangement; and
- the outstanding Bank Loan of $20 million.
To calculate the after-tax free cash flow of the Blood Products Business,
KPMG deducted estimated future cash taxes and estimated working capital
requirements, both of which were independently projected by KPMG, from Hemosol's
management's projected pre-tax cash flow prior to working capital needs.
<Table>
<Caption>
2004 2005 2006 2007 2008 2009 2010
------- ------- ------- ------ ------ ------- -------
(In thousands)
$ $ $ $ $ $ $
Pre-tax free cash flow prior to
working capital needs, as
projected by Hemosol's
management..................... (19,353) (15,796) (18,920) 10,963 63,708 103,799 147,493
Cash taxes....................... -- -- -- -- (8,983) (28,258) (46,721)
Working capital.................. 1,106 (416) (631) (1,700) (3,595) (3,295) (3,591)
------- ------- ------- ------ ------ ------- -------
After-tax free cash flow......... (18,247) (16,212) (19,551) 9,263 51,130 72,246 97,181
------- ------- ------- ------ ------ ------- -------
</Table>
Based on the foregoing, KPMG determined, using the discounted cash flow
analysis, the indicative value "en bloc" of the Blood Products Business to be in
the range of $55 million to $85 million (based on a discount rate of 35% and
30%, respectively), resulting in an indicative pro rata value of $3.85 million
to $5.95 million for the approximate 7% limited partnership interest in the
Blood Products Business to be, in effect, retained by Labco.
<Table>
<Caption>
DISCOUNT RATE
-----------------
35% 30%
------- -------
(In thousands)
$ $
Discounted cash flow value based on projections............. 51,800 81,700
Value of assets not reflected in projections................ 7,500 7,500
------- -------
Value of operations/business................................ 59,300 89,200
Cash to be received......................................... 16,000 16,000
Bank Loan................................................... (20,000) (20,000)
------- -------
"En bloc" value of the Blood Products Business under DCF
approach.................................................. 55,300 85,200
------- -------
Value of a pro rata 7% interest in the Blood Products
Business.................................................. 3,850 5,950
------- -------
</Table>
Market Capitalization Analysis
The market capitalization analysis provided an indicative value for the
Blood Products Business of approximately $90 million based on a Hemosol Share
price of $1.60 and approximately 56 million Hemosol Shares outstanding,
resulting in an indicative value of $6.3 million for the approximate 7% limited
partnership interest in the Blood Products Business to be, in effect,
transferred to Labco.
VALUE OF TAX LOSSES
Based on KPMG's analysis, the balance of the various Tax Loss accounts
which would remain with Labco following the completion of the Arrangement was
approximately $304 million as at December 31, 2003. This quantum of Tax Losses
is based on certain assumptions, including the assumption that $80 million of
undepreciated capital costs will be assigned to the value of the Blood Products
Business for the purposes of the relevant tax elections in connection with the
transfer of the Blood Products Business from Hemosol to the Blood Products
Partnership and the exclusion of $10 million of financing expenses of Hemosol
due to uncertainty as to their characterization.
KPMG determined the effective or implied transfer value of the Tax Losses
in the Arrangement based on the indicative values for each of the constituent
components to be, in effect, transferred and/or conveyed as part of the
25
Arrangement (other than the Tax Losses) together with the $16 million cash
infusion to the Blood Products Business as follows:
(a) using the discounted cash flow analysis to value the Blood Products
Business, KPMG determined that the value of the Tax Losses implied in
the Arrangement was in the range of $15.8 million to $18.0 million or
$0.052 to $0.059 per dollar of Tax Losses. The low end of such range
was based on a discount rate of 30% for the discounted cash flow
analysis and the low end of the range of the comparable trading
multiples for the Labs Business. The high end of such range was based
on a discount rate of 35% for the discounted cash flow analysis and
the high end of the range of the comparable trading multiples for the
Labs Business; and
(b) using the market capitalization analysis to value the Blood Products
Business, KPMG determined that the value of the Tax Losses implied in
the Arrangement was in the range of $15.5 million to $15.6 million or
approximately $0.051 per dollar of Tax Losses. The low end of such
range was based on the low end of the range of the comparable trading
multiples for the Labs Business. The high end of such range was based
on the high end of the range of the comparable trading multiples for
the Labs Business.
The following table summarizes the results of the discounted cash flow
approach and the market capitalization approach for determining the implied
transfer value of the Tax Losses:
<Table>
<Caption>
DISCOUNTED CASH FLOW MARKET CAPITALIZATION
APPROACH APPROACH
--------------------- ---------------------
LOW HIGH LOW HIGH
--------- --------- --------- ---------
(In thousands) (In thousands)
$ $ $ $
Effective transfers from MDS to Shareholders(1)
Cash................................................. 16,000 16,000 16,000 16,000
Labco 0.50% equity interest.......................... 2,838 2,950 2,838 2,950
Surrendered Warrants................................. 2,900 2,900 2,900 2,900
-------- -------- -------- --------
TOTAL.................................................. 21,738 21,850 21,738 21,850
Effective transfers from Shareholders(1) to MDS
Blood Products Partnership 7% equity interest........ 5,950 3,850 6,266 6,266
Implied value of Tax Losses.......................... 15,788 18,000 15,472 15,584
-------- -------- -------- --------
TOTAL.................................................. 21,738 21,850 21,738 21,850
Implied value of Tax Losses............................ 15,788 18,000 15,472 15,584
Tax Losses........................................... 304,000 304,000 304,000 304,000
Cents per dollar of Tax Losses....................... 5.2 5.9 5.1 5.1
</Table>
- ---------------
Note:
(1) Including MDS.
Based on KPMG's review of transactions involving tax attributes, including
those publicly announced and other non-public transactions in which KPMG
advised, tax attributes have recently transacted in the range of $0.05 to $0.08
per dollar of tax attribute resulting in an indicative value in the range of
$15.2 million to $24.32 million for the Tax Losses.
In assessing the reasonableness of the value of the Tax Losses implied in
the Arrangement, KPMG also considered other factors such as the nature of the
consideration to be received and KPMG's observation that in certain other
comparable transactions the relevant cash payment has been paid over time or may
be subject to contingencies, alternative transactions may involve the
discontinuance or significant restructuring of existing operations, the large
quantum of the Tax Losses and the limited number of companies and businesses
capable of taking advantage of such quantum of Tax Losses and alternative
opportunities that might be available to Hemosol based on certain expressions of
interest received and the degree of risk associated with concluding such
alternatives as compared to the Arrangement. In addition, KPMG also considered
certain additional factors that might influence the assessment of fairness from
a financial point of view, including the potential tax impact to Shareholders
resident in the U.S. KPMG has assumed that any adverse impact to US Holders
would be minimal.
26
MANAGEMENT PROJECTIONS
In connection with Hemosol's considerations of transactions to improve its
financial position, Hemosol updated and developed certain information in its
annual budget and financial planning documents and prepared projections of its
anticipated future operating performance for the seven fiscal years from 2004
through 2010. These projections were in part provided to the Independent
Committee, KPMG, MDS and PwC on a confidential basis. Hemosol advised the
recipients of the projections that the underlying assumptions and estimates upon
which the projections were based are subjective in many respects.
Management of Hemosol does not normally project earnings and is
particularly cautious of making projections for extended periods due to the
unpredictability of earnings. The projections are forward-looking statements
that are subject to risks and uncertainties that could cause projections to
differ materially from actual results and should be read with caution. Important
factors that could cause Hemosol's actual results to differ materially from the
projections include, but are not limited to, the successful and timely
completion of the pre-clinical and clinical development of its products,
Hemosol's ability to obtain regulatory approvals for its products, Hemosol's
ability to manufacture or have manufactured its products in commercial
quantities and at competitive costs, the competitive environment for therapeutic
and non-therapeutic protein products derived from human blood, the ability to
obtain adequate funding under acceptable terms to complete its development
programs and other factors set forth in "Risk Factors -- Risks Relating to the
Blood Products Partnership". The projections were not prepared by Hemosol's
management in the ordinary course and are based on a variety of estimates and
hypothetical assumptions made by Hemosol's management with respect to, among
other things, product development, regulatory approvals, market demand, industry
performance, general economic, interest rate and financial conditions, operating
and other revenues and expenses, capital expenditures and other matters. In
particular, in preparing these projections, Hemosol's management relied on the
following key assumptions:
- research and development spending was projected at the 2004 levels
throughout the projection period. Clinical development programs and
revenues for all pipeline products, including HEMOLINK, are excluded
from the projections;
- contract bio-manufacturing revenues generated from the Hemolink Building
are projected for the period from 2004 through 2006;
- clinical development revenues associated with the ProMetic Cascade
technology commence in 2005 and continue throughout the projection
period; and
- plasma processing utilizing the ProMetic Cascade technology commences in
2007 at 175,000 litres per year and increases to 950,000 litres per year
in 2010.
None of the assumptions may be realized and they are inherently subject to
significant business, economic and competitive uncertainties and contingencies,
all of which are beyond New Hemosol's control. Accordingly, there can be no
assurance that the assumptions made in preparing the projections will prove
accurate and actual results may materially differ. In addition, the projections
do not take into account any of the transactions in connection with the
Arrangement, which may also cause actual results to materially differ.
The projections summarized below were not prepared by Hemosol's management
with a view to public disclosure or compliance with the published guidelines of
the SEC or the guidelines established by the Institute of Certified Public
Accountants or the Canadian Institute of Chartered Accountants regarding
projections or forecasts, or either United States or Canadian GAAP. HEMOSOL'S
INDEPENDENT AUDITORS HAVE NOT EXAMINED OR COMPILED ANY OF THE PROJECTIONS OR
EXPRESSED ANY CONCLUSION OR PROVIDED ANY FORM OF ASSURANCE WITH RESPECT TO THE
PROJECTIONS AND, ACCORDINGLY, ASSUME NO RESPONSIBILITY FOR THEM. The projections
are included below to give Securityholders access to information that was not
publicly available and that was provided by Hemosol to the Independent
Committee, KPMG, MDS and PwC. The Canadian Securities Administrators have issued
National Policy Statement 48, which sets forth certain requirements which apply
to financial projections and forecasts which are included in certain documents
prepared by reporting issuers in Canada. THE PROJECTIONS WERE PREPARED BY
HEMOSOL'S MANAGEMENT FOR INTERNAL PURPOSES AND NOT FOR PUBLIC DISCLOSURE AND DO
NOT COMPLY WITH THE REQUIREMENTS OF NATIONAL POLICY STATEMENT 48. THE SUMMARY OF
THE SEVEN-YEAR PROJECTIONS SET OUT BELOW IS INCLUDED IN THIS DOCUMENT SOLELY TO
COMPLY WITH DISCLOSURE OBLIGATIONS UNDER THE U.S. FEDERAL SECURITIES LAWS.
27
For these reasons, as well as the bases and underlying assumptions on which
the projections were compiled, the inclusion of projections in this Circular
should not be regarded as an indication that the projections will be an accurate
prediction of future events and they should not be relied upon as such. Hemosol
does not assume any responsibility to any Securityholder for the reasonableness,
completeness, accuracy or reliability of the projections. No one has made, or
makes, any representation to the Securityholders regarding the projections and
neither Hemosol/Labco nor New Hemosol intends to update or otherwise revise the
projections to reflect circumstances existing after the date when made or to
reflect the occurrences of future events in the event that any or all of the
assumptions are shown to be in error.
The financial projections set forth below include EBITDA projections.
EBITDA is a non-GAAP measure and should not be considered an alternative to any
other measure of performance presented in accordance with United States or
Canadian GAAP. EBITDA, as used by Hemosol in these projections, is not
necessarily comparable with similarly titled measures of other companies because
not all companies calculate EBITDA in the same fashion.
<Table>
<Caption>
MANAGEMENT PROJECTIONS
------------------------------------------------------------------
2004 2005 2006 2007 2008 2009 2010
------- ------- ------- ------ ------- ------- -------
(In thousands)
$ $ $ $ $ $ $
Revenue......................... 6,500 17,000 35,026 60,331 124,519 183,088 250,513
EBITDA.......................... (13,453) (8,396) (720) 19,963 63,708 103,799 147,493
Capital expenditures and licence
payments...................... (5,900) (7,400) (18,200) (9,000) -- -- --
------- ------- ------- ------ ------- ------- -------
Pre-tax cash flow prior to
working capital needs......... (19,353) (15,796) (18,920) 10,963 63,708 103,799 147,493
</Table>
REASONS WHY MDS AND MDS SUBCO CONSIDER THE ARRANGEMENT TO BE FAIR TO NON-MDS
SECURITYHOLDERS
MDS and MDS Subco believe that, in the circumstances and after taking into
account the factors set forth below, the Arrangement is procedurally and
substantively fair to Non-MDS Securityholders.
As MDS and its affiliates (as such term is defined in the U.S. Exchange
Act) collectively own approximately 11.7% of the outstanding Hemosol Shares and
four members of the current Hemosol Board are directors, officers or employees
of MDS or affiliates thereof, MDS may be deemed to be an affiliate of Hemosol
for the purposes of Rule 13e-3 under the U.S. Exchange Act. In addition, as MDS
Subco and Hemosol may each be controlled (as such term is defined in the U.S.
Exchange Act) by MDS, MDS Subco may be deemed to be an affiliate of Hemosol for
the purposes of Rule 13e-3 under the U.S. Exchange Act. As a result, MDS and MDS
Subco are required, under Rule 13e-3, to state whether they reasonably believe
that the Arrangement is fair to Non-MDS Securityholders.
MDS AND MDS SUBCO ARE MAKING THE STATEMENTS INCLUDED IN THIS SECTION SOLELY
FOR THE PURPOSES OF COMPLYING WITH THE REQUIREMENTS OF RULE 13E-3 AND RELATED
RULES UNDER THE U.S. EXCHANGE ACT. MDS AND MDS SUBCO EXPRESSLY DO NOT UNDERTAKE
ANY FIDUCIARY RELATIONSHIP OR OBLIGATION TO THE HEMOSOL SECURITYHOLDERS (OTHER
THAN ANY OBLIGATION UNDER THE U.S. FEDERAL SECURITIES LAWS). MOREOVER, NEITHER
MDS NOR MDS SUBCO CONSIDERED THE FAIRNESS OF THE ARRANGEMENT TO NON-MDS
SECURITYHOLDERS IN DETERMINING TO ENTER INTO THE ARRANGEMENT, NOR DO THEY MAKE
ANY RECOMMENDATION WITH RESPECT TO THE ARRANGEMENT TO NON-MDS SECURITYHOLDERS.
MDS and MDS Subco believe that the Arrangement is procedurally fair to
Non-MDS Securityholders for the following reasons:
- the Independent Committee (comprised of three directors none of whom is
related to MDS or its affiliates or an employee of Hemosol) was formed
for the purpose of evaluating the Arrangement and oversaw the
negotiation of the terms of the Arrangement;
- the members of the Independent Committee and the Hemosol Board are
experienced and sophisticated in business and financial matters and were
well informed about the business, operations and prospects of Hemosol;
28
- the principal terms of the Arrangement were established through arm's
length negotiation with the Independent Committee and the management of
Hemosol (none of whom is related to MDS or its affiliates by virtue of
being a director, officer or employee of MDS) and during such
negotiation the interests of Non-MDS Securityholders were represented by
the Independent Committee and the management of Hemosol and their legal
and financial advisors;
- the Independent Committee retained KPMG as its financial advisor to
assist the Independent Committee in evaluating the Arrangement;
- KPMG has reviewed the Arrangement and advised the Independent Committee
that it believes that the Arrangement is fair, from a financial point of
view, to Non-MDS Securityholders, as described in "-- KPMG Fairness
Opinion";
- the Independent Committee and the Hemosol Board have each concluded that
the Arrangement is in the best interests of Hemosol and is fair, from a
financial point of view, to Non-MDS Securityholders, and the Hemosol
Board has recommended that the Securityholders vote in favour of the
Arrangement, as described in "-- Recommendation of the Hemosol Board"
and "-- Recommendation of the Independent Committee";
- MDS has been advised that each of the directors of Hemosol, other than
those affiliated with MDS, have agreed to vote their Hemosol Shares in
favour of the Arrangement;
- the Arrangement can only be completed if approved by the Court, and the
Court will determine the fairness of the Arrangement; and
- in order for the Arrangement to be approved, at least two-thirds of the
votes cast on the Arrangement Resolution by Securityholders, and at
least a majority of the votes cast thereon by the Minority Shareholders,
must be voted in favour of the Arrangement Resolution.
MDS and MDS Subco believe that the Arrangement is substantively fair to
Non-MDS Securityholders for the reasons set forth below.
LESS DILUTION THAN EQUITY FINANCING
- - The Arrangement provides Hemosol's Blood Products Business with a cash
infusion of $16 million in a manner that MDS and MDS Subco believe is less
dilutive to existing Shareholders than an equity financing, assuming that
Hemosol could raise funds through an equity financing. Shareholders
immediately prior to the Effective Time will receive, in effect, one New
Hemosol Share and one Labco Class A Share in exchange for each Hemosol Share
held. The holdings of each Shareholder in New Hemosol will be on the same
proportionate basis as their holdings in Hemosol immediately prior to the
Effective Time.
CONSIDERATION FOR TAX LOSSES
- - The $16 million cash infusion forming part of the consideration for the
transaction, when considered alone in relation to the Tax Losses, results in
an effective value attributed to the Tax Losses within the range of values
calculated by PwC in the PwC Draft Report (as described below) based on the
methodologies applied by PwC as set out in the PwC Draft Report. In addition
to the $16 million cash infusion, MDS is also surrendering the Surrendered
Warrants, which provides additional value and which, if also attributed to
the Tax Losses, further increases the effective value attributed to Tax
Losses. In considering the reasonableness of the value of such Tax Losses,
MDS also considered the fact that the cash received by Hemosol's Blood
Products Business (other than the Escrow Amount) will not be received over
time or upon the occurrence of contingent events, unlike other transactions
involving tax losses of which MDS is aware.
CONTINUED PARTICIPATION IN BLOOD PRODUCTS BUSINESS AND NEW PARTICIPATION IN LABS
BUSINESS
- - Non-MDS Securityholders, by receiving New Hemosol Shares, will continue to
participate in the Blood Products Business through New Hemosol's general
partnership interest in the Blood Products Partnership and, to a limited
extent, through Labco's limited partnership interest in the Blood Products
Partnership. In addition, Non-MDS Securityholders, by receiving Labco Class
A Shares, will be able to participate in the business and future growth of
the Labs Business through Labco's limited partnership interest in the Labs
Partnership, other than the first $16 million of profits of the Labs
Partnership following the Arrangement because such profits will
29
be used to retire the $16 million loan made by MDS to the Labs Partnership
to fund the cash infusion to the Blood Products Business.
APPLICABLE SECURITIES LAWS
- - The Arrangement is being carried out in compliance with Rule 61-501 and
Policy Q-27 (subject to the exemption orders obtained from the OSC and AMF
relieving Hemosol from the requirement to have a formal valuation prepared).
Among other matters, those provisions require that the Arrangement must be
approved by a majority of the votes cast by Minority Shareholders.
Compliance with Rule 61-501 and Policy Q-27 (and any exemptions therefrom)
is generally viewed in Canada as a fair means to ensure procedural and
substantive fairness to minority shareholders with respect to transactions
such as the Arrangement.
- - Upon completion of the Arrangement, New Hemosol and Labco will be reporting
issuers in each of the provinces of Canada. In addition, both the New
Hemosol Shares and the Labco Class A Shares will be registered under the
U.S. Exchange Act. As a result, New Hemosol and Labco will each be subject
to the continuous disclosure obligations of Canadian and U.S. federal
securities laws.
US HOLDERS
- - The Arrangement will likely be treated as a taxable distribution of New
Hemosol Shares by Labco for U.S. federal income tax purposes. This deemed
distribution may result in US Holders incurring U.S. federal income tax
liability (see "Income Tax Considerations -- Certain United States Federal
Income Tax Considerations"). In considering the fairness of the Arrangement,
MDS and MDS Subco considered the fact that the Arrangement has been
structured to minimize the portion of such distribution that is taxable to
US Holders.
MDS and MDS Subco believe that the foregoing factors and the active
involvement and arm's length negotiation by the Independent Committee adequately
support the belief of MDS and MDS Subco as to the substantive fairness of the
Arrangement to Non-MDS Securityholders. MDS's and MDS Subco's belief as to the
substantive fairness of the Arrangement to Non-MDS Securityholders was not based
upon any of the following, as they did not believe, given the nature of the
transactions, that these factors were relevant in the circumstances: current or
historical market prices of the Hemosol Shares, the net book value of the
Hemosol Shares, the going concern or liquidation value of Hemosol, the purchase
prices previously paid by MDS or affiliates for Hemosol Shares and the substance
of the KPMG Fairness Opinion described under "-- KPMG Fairness Opinion" above.
MDS is not aware of any firm offer made by any unaffiliated person during the
past two years for any merger or consolidation of Hemosol, the sale or other
transfer of all or any substantial part of the assets of Hemosol, or any
purchase of Hemosol's securities that would enable the purchaser to exercise
control of Hemosol.
The above factors are not intended to be exhaustive. In light of the number
and variety of factors, it was not practicable for MDS and MDS Subco to assign
relative weights to the foregoing factors and accordingly relative weights were
not assigned.
DRAFT REPORT OF PRICEWATERHOUSECOOPERS LLP
Management of MDS retained PwC to provide financial advisory services,
including tax and valuation analysis related to Hemosol, the Tax Losses, the
5,000,000 Tranche A Warrants that were then exercisable, interests in the Blood
Products Business and the Labs Business, and to perform transactional due
diligence in connection with the Arrangement.
PwC is the world's largest professional services organization with more
than 125,000 people in 142 countries. PwC's Canadian business valuation group
was formed in 1970 and has been actively involved in providing business and
securities valuation services since that time. PwC has extensive experience in
completing and defending, when necessary, engagements involving the valuation of
companies for various purposes, including transactions subject to public
scrutiny, fairness opinions, the sale or purchase of entities or assets by
related parties, assistance in resolving shareholders' disputes, tax-based
corporate reorganizations, financial reporting and merger and acquisition
activity.
MDS retained PwC based on its experience in conducting due diligence and
providing valuations and tax advisory services in transactions of this nature.
MDS and PwC entered into a formal engagement agreement on November 19, 2003, as
amended on November 26, 2003. The terms of the engagement agreement provide that
PwC is to be paid fees for its services as financial advisor to MDS. In
addition, PwC is to be reimbursed for administration
30
expenses and other disbursements and to be indemnified by MDS. The fees payable
to PwC under its engagement agreement are not contingent in whole or in part
upon the success of the Arrangement.
At a meeting of senior management of MDS on December 11, 2003, PwC orally
set out its findings and valuation estimates which were then set out in the
draft report prepared by PwC based on information and analysis as of December 4,
2003 and sent to MDS on January 12, 2004 (the "PwC Draft Report").
THE PWC DRAFT REPORT IS BEING DISCLOSED FOR THE PURPOSES OF COMPLYING WITH
THE REQUIREMENTS OF RULE 13E-3 AND RELATED RULES UNDER THE U.S. EXCHANGE ACT.
PWC ACCEPTS NO RESPONSIBILITY OR LIABILITY FOR THE USE OF THE PWC DRAFT REPORT
BY THE SECURITYHOLDERS OF HEMOSOL, THE SHAREHOLDERS OF MDS OR ANY OTHER PARTY.
THE PWC DRAFT REPORT WAS PREPARED FOR THE ASSISTANCE OF SENIOR MANAGEMENT OF MDS
PRIOR TO DETERMINATION OF THE FINAL TERMS OF THE ARRANGEMENT AND IS NOT INTENDED
TO BE, AND DOES NOT CONSTITUTE, A RECOMMENDATION TO ANY NON-MDS SECURITYHOLDER
AS TO HOW SUCH NON-MDS SECURITYHOLDER SHOULD VOTE WITH RESPECT TO THE
ARRANGEMENT RESOLUTION. THE PWC DRAFT REPORT IS FURTHER SUBJECT TO SIGNIFICANT
RESTRICTIONS AND QUALIFICATIONS, LIMITATIONS IN SCOPE AND ASSUMPTIONS OUTLINED
THEREIN.
THE PWC DRAFT REPORT IS NOT A FAIRNESS OPINION OR A FORMAL VALUATION
PURSUANT TO SECURITIES REGULATIONS AND WAS NOT PRESENTED TO THE BOARD OF
DIRECTORS OF MDS. MOREOVER, THE PWC DRAFT REPORT DOES NOT CONSIDER OR ADDRESS
THE FAIRNESS OF THE ARRANGEMENT TO SECURITYHOLDERS OF HEMOSOL, THE SHAREHOLDERS
OF MDS OR ANY OTHER PARTY AND THE PWC DRAFT REPORT SHOULD NOT BE CONSIDERED FOR
SUCH PURPOSE. FURTHERMORE, THE PWC DRAFT REPORT HAS NOT BEEN UPDATED, NOR HAS
MDS REQUESTED PWC TO UPDATE SUCH REPORT, FOR ANY CHANGES IN THE TERMS OF THE
ARRANGEMENT, NEW INFORMATION OR CHANGES IN MARKET CONDITIONS SINCE DECEMBER 4,
2003. FOR EXAMPLE, THE PWC DRAFT REPORT DOES NOT CONSIDER THE SURRENDERED
WARRANTS AS THEY WERE NOT PART OF THE PROPOSED TRANSACTION AT THE TIME THAT PWC
PERFORMED ITS WORK FOR MDS. AS A RESULT, THE INFORMATION SET OUT IN THE PWC
DRAFT REPORT MAY NOT BE RELEVANT TO THE ARRANGEMENT.
The full text of the PwC Draft Report, which sets out the assumptions,
matters considered, limitations, restrictions and qualifications and the
findings and valuation estimates made by PwC, is filed as an exhibit to the
Schedule 13E-3 filed by Hemosol, MDS and MDS Subco with the SEC pursuant to the
requirements of the U.S. Exchange Act. The summary of the PwC Draft Report
contained herein is qualified in its entirety by reference to the full text of
the PwC Draft Report.
To prepare the PwC Draft Report, PwC reviewed, considered and relied upon
documentation and information and representations provided to PwC without
additional audit or verification, including the following:
- discussions with management of MDS and Hemosol;
- the Letter of Understanding;
- various financial and other information provided by management of MDS
and Hemosol;
- limited research of the industry in which Hemosol operates, including
market statistics of comparable public companies and market
transactions;
- MDS's Annual Information Form for the year ended October 31, 2002 dated
January 31, 2003;
- unaudited summary financial information prepared by management of MDS
for the Labs Business for the fiscal years of MDS ended October 31,
2001, 2002 and 2003 and pro forma summary financial information prepared
by management of MDS for the Labs Business for the fiscal year of MDS
ending October 31, 2004;
- supporting financial documentation and discussions with management of
MDS with respect to the allocation of sector overheads and expenses to
the Labs Business;
- Hemosol's Annual Information Form for the year ended December 31, 2002
dated May 27, 2003;
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- Hemosol's audited 2002 annual report and unaudited interim report for
the nine-month period ended September 30, 2003 and Hemosol's budget for
the fourth quarter of 2003;
- draft ProMetic MOU as at November 25, 2003; and
- research into general economic conditions and the general pharmaceutical
and pharmaceutical contract manufacturing industry.
In addition to the above documentation, information and representations,
PwC has received a written letter of representation from MDS confirming the
completeness and accuracy of the information provided to PwC by MDS.
PwC relied upon and assumed the completeness, accuracy and fair
presentation of all financial and other information, data, advice, opinions,
representations and other material obtained by it from public sources or
provided to it by, on behalf of or at the request of Hemosol or MDS. The
findings by PwC in the PwC Draft Report are conditional upon such completeness,
accuracy and fair presentation. PwC has assumed, among other things, that the
projections and budgets provided to it by management of Hemosol and MDS
represent the best estimate of the most probable results for the Blood Products
Business and the Labs Business for the periods presented therein.
In connection with the documentation, information and representations noted
above, PwC performed the procedures outlined below which formed the basis for
its conclusions in the PwC Draft Report with respect to the various components
of the Arrangement. PwC performed such analyses, investigations, research,
testing of assumptions and considered such factors as PwC deemed appropriate,
and in furtherance thereof, PwC:
LABS BUSINESS
- - held discussions with management of MDS and reviewed the Tax Ruling (but not
including the supplemental ruling dated February 5, 2004) to obtain an
understanding of the proposed transaction as at December 4, 2003;
- - reviewed certain publicly available and internal financial statements and
other financial and operating data of MDS, as described above, related to
the Labs Business;
- - analyzed certain historical and pro forma financial information and other
financial operating data prepared by the management of MDS;
- - discussed the past and current operations and financial condition and the
prospects of the Labs Business with senior executives of MDS;
- - performed limited research into the industry and economy in which the Labs
Business operates;
- - compared the financial performance of the Labs Business with that of certain
somewhat comparable publicly-traded companies and their securities; and
- - assessed the most appropriate valuation methodology to apply, being a
capitalization of EBITDA of $45 million using capitalization multiples of
10.5 to 11.5, based upon the due diligence performed by PwC and PwC's
judgment;
BLOOD PRODUCTS BUSINESS
- - reviewed certain publicly available and internal financial statements and
other financial and operating data of Hemosol related to the Blood Products
Business and Hemosol's research and development pipeline, as described
above;
- - analyzed the historical and projected financial information and other
financial operating data of the Blood Products Business, in each case
prepared by the management of Hemosol;
- - engaged an independent life sciences industry expert to assist with
discussions and review of documentation related to Hemosol's products under
development;
- - discussed the past and current operations and financial condition and the
prospects of Hemosol and the Blood Products Business with senior executives
of Hemosol and MDS;
- - performed limited research into the industry and economy in which Hemosol
and the Blood Products Business operates and/or expects to operate;
- - reviewed the reported prices and trading activity for the Hemosol Shares;
32
- - compared the financial performance of the Blood Products Business with that
of certain somewhat comparable publicly-traded companies and their
securities;
- - assessed the most appropriate valuation methodology to apply to the Blood
Products Business, being a discounted cash flow of the business case
presented by the management of Hemosol, as adjusted by PwC, using a discount
rate of 25%, based upon the due diligence performed by PwC and PwC's
judgment;
- - considered alternative valuation methods for Hemosol and the Blood Products
Business, including a discounted cash flow analysis of the unadjusted cash
flows prepared by Hemosol's management and an orderly liquidation analysis;
and
- - considered the value of assets redundant to the operations of the Blood
Products Business;
TAX LOSSES
- - reviewed certain financial data of Hemosol related to the Tax Losses such as
tax returns, notices of assessment and filings related to scientific
research and experimental development claims;
- - analyzed and reviewed the financial model prepared by management of MDS for
the calculation of the net present value of the Tax Losses;
- - discussed the nature and amount of the Tax Losses with senior executives of
Hemosol and MDS;
- - performed limited research into publicly disclosed transactions related to
tax losses; and
- - calculated a range of possible values for the Hemosol Tax Losses and the net
present value to MDS based on a discount rate of 9% using the financial
model prepared by management of MDS for the calculation of the net present
value of the Tax Losses and various assumptions;
5,000,000 TRANCHE A WARRANTS
- - reviewed documentation setting out the terms of the Tranche A Warrants;
- - reviewed reported volatility of the share trading price of Hemosol;
- - obtained the reported price for Hemosol Shares on December 4, 2003; and
- - employed a Black-Scholes option pricing model to value the 5,000,000 Tranche
A Warrants then exercisable including the use of volatility in the range of
85% to 110%, and a risk-free rate of 3.81%.
In addition to the foregoing, PwC performed such additional analysis,
investigations, research, testing of assumptions and considerations that it
considered necessary or appropriate.
PwC's findings and valuation estimates, as discussed with senior management
of MDS, are subject to the various assumptions, limitations and qualifications
set out in the PwC Draft Report, which PwC deemed to be appropriate in the
circumstances. Based upon the scope and basis of PwC's review, each summarized
above, and the significant assumptions made by PwC and subject to the
restrictions and qualifications set out in the PwC Draft Report, PwC estimated
the value of various components of the Arrangement as at December 4, 2003. These
estimates were summarized in the PwC Draft Report as follows:
- the estimated fair market value of the Labs Partnership was in the range
of $472.5 million to $517.5 million;
- the estimated fair market value of a 10% ownership interest in the Blood
Products Partnership was in the range of $1.9 million to $4.0 million;
and
- the estimated fair market value of the 5,000,000 Tranche A Warrants then
exercisable was in the range of $5.4 million to $6.1 million.
In addition, the PwC Draft Report presented PwC's findings with respect to
its review of MDS's analysis used to assess the value of the Tax Losses,
providing a calculation of the possible range of net present values to MDS for
the use of the Tax Losses, based upon varying amounts that might be paid to
Hemosol. PwC calculated that the range of appropriate payment amounts to Hemosol
of $10.2 million ($0.05 per dollar of Tax Losses) to $22.4 million ($0.085 per
dollar of Tax Losses) resulted in a net present value benefit to MDS of $74.0
million to $62.3 million, respectively. Based upon its analysis, PwC selected
suggested values for the Tax Losses in the range of $11.9 million to $17.2
million.
33
THE ARRANGEMENT
The following description of the transactions occurring in connection with
the Arrangement is a summary only and is qualified in its entirety by reference
to the full text of the Arrangement Agreement, a copy of which is attached to
this Circular as Annex D, and the Plan of Arrangement, which details all of the
steps in the Arrangement, a copy of which is attached as Exhibit 1 to the
Arrangement Agreement, each of which should be read carefully in its entirety.
Hemosol and MDS have entered into the Arrangement Agreement which provides
for the implementation of the Arrangement pursuant to section 182 of the OBCA.
Section 182 of the OBCA permits a corporation to propose a plan of arrangement
to implement a reorganization involving the business of the corporation or of
any or all of the holders of its securities or of any options or rights to
acquire any of its securities. Hemosol is proposing the Plan of Arrangement as
an efficient method of implementing the reorganization contemplated by the
Arrangement Agreement. The OBCA sets forth the process that Hemosol must follow
in implementing the Arrangement. In accordance with the process set forth in the
OBCA, Hemosol applied for, and obtained on March 9, 2004, the Interim Order of
the Court which specifies the notice to be given in connection with the Meeting
to consider the Arrangement.
The Meeting will be held on April 20, 2004 at which time the
Securityholders will vote on the Arrangement Resolution. If the Arrangement
Resolution is passed by the requisite vote of the Securityholders and Minority
Shareholders, Hemosol will apply to the Court for the Final Order approving the
Arrangement. Such application has been scheduled to be heard on April 22, 2004.
The Court, in hearing the application for the Final Order, will consider, among
other things, the fairness and reasonableness of the Arrangement. If the Court
approves the Arrangement, either as proposed or as amended in any manner the
Court may direct, and provided that all of the conditions to the Arrangement set
forth in the Arrangement Agreement have been satisfied or waived, Hemosol will
file Articles of Arrangement under the OBCA and the Certificate of Arrangement
will be issued under the OBCA giving effect to the Arrangement. Hemosol expects
to file the Articles of Arrangement as soon as reasonably practicable following
the grant of the Final Order and expects that the Certificate of Arrangement
will be issued the same day, which date will be the Effective Date. See "The
Arrangement -- Securityholder Approvals" and "-- Court Approval" in this
Circular.
PRE-ARRANGEMENT ORGANIZATIONAL STRUCTURE
The following diagram sets out the corporate structure of Hemosol
immediately prior to the Effective Time (assuming that MDS's shareholdings of
Hemosol immediately prior to the Effective Time are the same as its current
shareholdings).
(PRE-ARRANGEMENT ORGANIZATIONAL STRUCTURE DIAGRAM)
TRANSACTION STEPS OUTSIDE THE PLAN OF ARRANGEMENT
In order to implement the Arrangement, certain transactions have been, or
on or prior to the Effective Date will be, undertaken by Hemosol and MDS.
34
HEMOSOL
On or prior to the Effective Date, Hemosol will undertake certain steps and
enter into certain agreements, including the following:
(a) obtain from the Bank a release of all registered security interests
against Hemosol and its assets effective the Effective Time;
(b) lend $6,000 to New Hemosol to enable it to purchase a general
partnership interest in the Blood Products Partnership;
(c) form the Blood Products Partnership by entering into the Blood
Products Partnership Agreement with New Hemosol;
(d) enter into the Blood Products Contribution Agreement;
(e) cause the Blood Products Partnership to enter into the Blood Products
Security Agreements and to grant the security interests in respect of
all of its assets to the Bank in respect of the Bank Loan;
(f) cause New Hemosol to enter into the Escrow Agreement; and
(g) enter into the Partnership Interest Transfer Agreement.
MDS
On January 1, 2004, MDS transferred all employees and medical directors
that are employed by MDS solely in the Labs Business to MDS Subco.
On or prior to the Effective Date, MDS will undertake certain steps and
enter into certain agreements, including the following:
(a) lend MDS Subco $50,000 to enable it to purchase its general
partnership interest in the Labs Partnership;
(b) form the Labs Partnership by entering into the Labs Partnership
Agreement with MDS Subco;
(c) enter into the Labs Contribution Agreement with the Labs Partnership;
(d) lend $16 million to the Labs Partnership and cause the Labs
Partnership to lend $16 million to Labco;
(e) lend $10 million to the Labs Partnership to meet initial working
capital requirements of the Labs Business;
(f) enter into the Partnership Interest Transfer Agreement; and
(g) subject to the release of MDS by the Bank under the MDS Guarantee,
enter into the BPP Guarantee.
TRANSACTION STEPS UNDER THE PLAN OF ARRANGEMENT
Pursuant to the terms of the Plan of Arrangement, at the Effective Time,
the following events will occur in the following order:
(a) MDS Subco will contribute $50,000 to the Labs Partnership for its
0.01% general partnership interest in the Labs Partnership pursuant to
the terms of the Labs Partnership Agreement;
(b) in accordance with the terms of the Labs Contribution Agreement, MDS
will contribute the Labs Assets to the Labs Partnership and the Labs
Partnership will issue the Labs Partnership Interest to MDS in
consideration therefor;
(c) New Hemosol will contribute $6,000 to the Blood Products Partnership
and the Blood Products Partnership will issue one Blood Products LP
Unit to New Hemosol in consideration therefor;
(d) in accordance with the Blood Products Contribution Agreement, Hemosol
will contribute the Blood Products Assets to the Blood Products
Partnership and, in consideration therefor, the Blood Products
Partnership will assume the Blood Products Liabilities and issue 9,999
Blood Products LP Units to Labco; following the transfer by Hemosol of
the Blood Products Assets to the Blood Products Partnership, Hemosol
is referred to as Labco;
(e) all Hemosol Options will be cancelled and: (i) all holders of Hemosol
Options who have consented to the treatment of their Hemosol Options
as contemplated in this clause (i) will receive in exchange for each
35
of such cancelled Hemosol Options that are Specified Hemosol Options,
one New Hemosol Option with vesting and exercise terms identical to
such cancelled Specified Hemosol Options, but having an exercise price
equal to the exercise price of such cancelled Specified Hemosol
Options less $0.04 and will receive no New Hemosol Options in exchange
for their cancelled Hemosol Options that are not Specified Hemosol
Options; and (ii) all holders of Hemosol Options who have not
consented to the treatment of their Hemosol Options as contemplated in
the preceding clause (i) and all holders of Hemosol Options who do not
hold any Specified Options will receive in exchange for each of such
cancelled Hemosol Options (excluding Specified Options), one New
Hemosol Option with vesting and exercise terms identical to such
cancelled Hemosol Option, but having an exercise price equal to the
exercise price of such cancelled Hemosol Option less $0.04;
(f) the articles of Labco will be amended to create and authorize the
issuance of an unlimited number of Labco Class A Shares and Labco
Class B Non-Voting Shares and that number of Labco Class C Shares
equal to the number of issued and outstanding Hemosol Shares
immediately prior to the Effective Time in each case having the
rights, privileges, restrictions and conditions set forth in the Labco
Share Conditions;
(g) the one New Hemosol Share held by Hemosol immediately prior to the
Effective Time will be purchased for cancellation by New Hemosol from
Labco in consideration for a cash payment of $1.00;
(h) each holder of Hemosol Shares will be deemed to have exchanged each
issued and outstanding Hemosol Share for one Labco Class A Share and
one Labco Class C Share and each such Hemosol Share will be cancelled
such that, upon the completion of the foregoing, no Hemosol Shares
will be outstanding;
(i) the amount to be added to the stated capital account maintained for
the Labco Class C Shares in respect of each Labco Class C Share will
be equal to the Class C Redemption Amount (as defined in "Labco After
the Arrangement" below);
(j) the amount to be added to the stated capital account maintained for
the Labco Class A Shares will be equal to the fair market value of
the Hemosol Shares immediately prior to the Effective Time
(determined in accordance with the Plan of Arrangement) and subject
to any reduction required by subsection 86(2.1) of the Tax Act less
the aggregate Class C Redemption Amount;
(k) the stated capital account maintained in respect of the Hemosol Shares
will be decreased to zero;
(l) each holder of Labco Class C Shares will be deemed to have
transferred each issued and outstanding Labco Class C Share to New
Hemosol in exchange for one New Hemosol Share such that, following
such transfer, all of the issued and outstanding Labco Class C Shares
will be held by New Hemosol;
(m) the Tranche A Warrants will be amended, in partial consideration for
the issuance of Labco Class A Shares and Labco Class B Non-Voting
Shares as provided in paragraph (q), so that the aggregate number of
Hemosol Shares to which MDS is entitled thereunder will be reduced by
500,000 with such reduction to be effected by reducing by 50% MDS's
entitlement to acquire Hemosol Shares which entitlement has vested (or
will vest) on February 22, 2004, March 22, 2004 and April 22, 2004;
(n) New Hemosol will assume the obligations of Hemosol under the Hemosol
Convertible Securities as if such Hemosol Convertible Securities were
a right to acquire New Hemosol Shares (other than a reduction of the
exercise price of each Hemosol Convertible Security by $0.04) and
Labco will redeem all issued and outstanding Labco Class C Shares held
by New Hemosol for a redemption price per Labco Class C Share equal to
the Class C Redemption Amount which consideration for the assumption
and the redemption price will be paid by Labco by a transfer to New
Hemosol of 9,112 Blood Products LP Units and the cash payment of $16
million;
(o) the MDS MOU will be terminated and New Hemosol and MDS will enter into
the New Hemosol MOU in partial consideration for the issuance by Labco
to MDS of Labco Class A Shares and Labco Class B Non-Voting Shares as
provided in paragraph (q);
(p) New Hemosol will subscribe for 2,500 additional Blood Products LP
Units in consideration for a subscription price of $15 million such
that following such subscription New Hemosol will hold 11,613 Blood
Products LP Units and Labco will hold 887 Blood Products LP Units;
36
(q) Labco will issue to MDS the MDS Additional Class A Shares and the MDS
Class B Non-Voting Shares in consideration for the Labs Partnership
Interest transferred from MDS in accordance with the terms of the
Partnership Interest Transfer Agreement and the surrender of the
Surrendered Warrants;
(r) the amount to be added to the stated capital account maintained by
Labco for the Labco Class A Shares and the Labco Class B Non-Voting
Shares in respect of the shares issued in paragraph (q) will be equal
to the value of the consideration received for the issuance of such
shares less the deduction required by subsection 85(2.1) of the Tax
Act;
(s) the articles of Labco will be amended to (i) change its name from
Hemosol Inc. to LPBP Inc., (ii) delete the provisions relating to
registered office, number of directors, authorized share capital and
share conditions of the Hemosol Shares and the Hemosol Special Shares
and (iii) add the provisions set out in Appendix A to the Plan of
Arrangement;
(t) the Labco Board will consist of four members, initially being Edward
E. McCormack, Edward K. Rygiel, Wilfred G. Lewitt and Mitchell J.
Kostuch; and
(u) the year-end of Labco will be October 31.
See the Arrangement Agreement and Plan of Arrangement reproduced in Annex D
to this Circular.
POST-ARRANGEMENT ORGANIZATIONAL STRUCTURE
The following diagram sets out the corporate structure of Hemosol and New
Hemosol immediately following the Effective Time (assuming that MDS's
shareholdings of Hemosol immediately prior to the Effective Time are the same as
its current shareholdings).
(POST-ARRANGEMENT ORGANIZATIONAL STRUCTURE DIAGRAM)
- ---------------
Notes:
(1) While Public Shareholders will hold 0.44% of Labco's equity securities
through their holdings of Labco Class A Shares, such shares will have
attached thereto not less than 52.5% of the votes attaching to all voting
shares of Labco.
(2) While MDS will hold 99.56% of Labco's equity securities through its
holdings of Labco Class A Shares and Labco Class B Non-Voting Shares, such
shares will have attached thereto not more than 47.5% of the votes
attaching to all voting shares of Labco.
37
TREATMENT OF HEMOSOL CONVERTIBLE SECURITIES IN CONNECTION WITH THE ARRANGEMENT
As at March 10, 2004, Hemosol had the following Hemosol Convertible
Securities outstanding:
(a) 60,000 warrants issued to National Bank of Canada on April 22, 2002
entitling National Bank of Canada to purchase 60,000 Hemosol Shares at
an exercise price of $6.31 per Hemosol Share at any time before April
22, 2007;
(b) 45,000 warrants issued to The Bank of Nova Scotia on April 22, 2002
entitling The Bank of Nova Scotia to purchase 45,000 Hemosol Shares at
an exercise price of $6.31 per Hemosol Share at any time before April
22, 2007;
(c) 400,000 warrants issued to The Manufacturers Life Insurance Company on
December 14, 2000 entitling The Manufacturers Life Insurance Company
to purchase 400,000 Hemosol Shares at an exercise price of $18.00 per
Hemosol Share at any time before December 14, 2005;
(d) the Tranche A Warrants;
(e) 3,720,891 Hemosol Warrants issued to a number of warrantholders on
January 22, 2004. Each Hemosol Warrant entitles the holder thereof to
acquire one Hemosol Share at a price of $0.90 per Hemosol Share at any
time prior to the earlier to occur of: (i) November 28, 2006; and (ii)
the 30th day immediately following the date on which Hemosol notifies
the warrantholders that the volume-weighted average price of a Hemosol
Share on the TSX for 20 consecutive trading days is greater than or
equal to $2.25; and
(f) 392,090 Broker Options, of which 294,068 were issued to Loewen,
Ondaatje, McCutcheon Limited and 98,022 were issued to Vengate Capital
Partners Company. Each Broker Option entitles the holder thereof to
purchase one Hemosol Share and one-half of one Hemosol Warrant at a
price of $0.75 exercisable at any time prior to the earlier to occur
of: (i) November 28, 2006; and (ii) the 30th day immediately following
the date on which Hemosol notifies the Broker Optionholders that the
volume-weighted average price of a Hemosol Share on the TSX for 20
consecutive trading days is greater than or equal to $2.25.
As part of the Arrangement, Hemosol Convertible Securities will become New
Hemosol Convertible Securities with the right to purchase New Hemosol Common
Shares on terms identical to the relevant Hemosol Convertible Securities, other
than a reduction of the exercise price by $0.04. Such reduction of exercise
price accounts for the fact that holders of New Hemosol Convertible Securities
will not be entitled to receive Labco Class A Shares on exercise and has been
designed to maintain economic equivalence for holders of Hemosol Convertible
Securities. The $0.04 reduction approximates the value of a Labco Class A Share
based on the range of indicative aggregate values for the Labco Class A Shares
to be distributed to Shareholders considered by KPMG for the purposes of the
KPMG Fairness Opinion (see "Special Factors -- KPMG Fairness Opinion -- Value of
Labco Class A Shares") and approximately 69.72 million Labco Class A Shares that
would be distributed (based on a fully diluted number of Hemosol Shares assuming
the exercise of Hemosol Convertible Securities and Hemosol Options reasonably
considered to be in the money).
TREATMENT OF TRANCHE A WARRANTS AND TRANCHE B WARRANTS
MDS currently holds the Tranche A Warrants and the right to acquire Tranche
B Warrants under certain circumstances, as described in "Hemosol Prior to the
Arrangement -- Credit Facility". Under the Arrangement, MDS will surrender
500,000 Tranche A Warrants and its right to acquire 2,000,000 Tranche B
Warrants.
Tranche A Warrants
The Plan of Arrangement provides that the Tranche A Warrants will be
amended such that the aggregate number of Hemosol Shares to which MDS is
entitled thereunder will be reduced by 500,000, as a result of which MDS would
be entitled to acquire upon the exercise of the Tranche A Warrants, up to
5,500,000 Hemosol Shares. The reduction of the number of Hemosol Shares to which
MDS is entitled on the exercise of the Tranche A Warrants will be effected by
reducing by 50% MDS's entitlement to acquire Hemosol Shares which entitlement
has vested or will vest, as the case may be, on February 22, 2004, March 22,
2004 and April 22, 2004. The Tranche A Warrants will then be treated in the same
way as all Hemosol Convertible Securities, as described in "-- Treatment of
Hemosol Convertible Securities" below. As a result, after the Effective Date,
MDS will hold warrants of New Hemosol that entitle MDS to acquire, on the due
exercise thereof, up to 5,500,000 New Hemosol Shares, on terms
38
and conditions identical to the terms and conditions of the Tranche A Warrants
with the exception of the exercise price which will be reduced by $0.04 per
Tranche A Warrant.
Tranche B Warrants
The Plan of Arrangement provides that on the Effective Date the MDS MOU,
which sets out the terms and conditions of the Tranche B Warrants, will be
terminated and New Hemosol and MDS will enter into the New Hemosol MOU. The New
Hemosol MOU will set out the terms and conditions of the right of MDS to
acquire, in certain circumstances, up to 2,000,000 warrants to purchase New
Hemosol Shares, on the same terms as the Tranche B Warrants, except that the
number of warrants vesting each month will be reduced by 50% and the exercise
price will be reduced by $0.04 per Tranche B Warrant.
TREATMENT OF HEMOSOL CONVERTIBLE SECURITIES
Under the Plan of Arrangement, New Hemosol will assume the obligations of
Hemosol under the Hemosol Convertible Securities as if such Hemosol Convertible
Securities provided a right to acquire New Hemosol Shares (other than a
reduction of the exercise price of each relevant Hemosol Convertible Security by
$0.04). The reduction of the exercise price accounts for the fact that the New
Hemosol Convertible Securities will only be exercisable into New Hemosol Shares
(and warrants of New Hemosol to purchase New Hemosol Shares, in the case of the
Broker Options) and not, in addition thereto, into Labco Class A Shares (and
warrants of Labco to purchase Labco Class A Shares, in the case of the Broker
Options).
As a result, on the Effective Date, Hemosol Convertible Securities (other
than Broker Options) will become New Hemosol Convertible Securities that will be
exercisable into New Hemosol Shares and will have identical terms to the
relevant current Hemosol Convertible Securities, except for a reduction of the
exercise price by $0.04. Similarly, Broker Options will become broker options of
New Hemosol that will be exercisable into New Hemosol Shares and warrants of New
Hemosol to purchase New Hemosol Shares, on identical terms to the current Broker
Options, except for a reduction of the exercise price by $0.04 of (i) such
broker options and (ii) the warrant to purchase New Hemosol Shares to be
received upon the exercise of such broker options.
TREATMENT OF HEMOSOL OPTIONS IN CONNECTION WITH THE ARRANGEMENT
Under the Plan of Arrangement, all Hemosol Options will be cancelled and
replaced with New Hemosol Options with vesting and exercise terms identical to
those of the cancelled Hemosol Options, but having an exercise price equal to
the exercise price of such cancelled Hemosol Options less $0.04, except that
holders of Hemosol Options that so consent will only receive New Hemosol Options
in respect of cancelled Hemosol Options that are Specified Hemosol Options and
will not receive any New Hemosol Options in respect of cancelled Hemosol Options
that are not Specified Hemosol Options.
The Specified Hemosol Options include Hemosol Options that were
conditionally granted in 2003 to ensure the retention of key personnel in light
of Hemosol's financial resources and the challenges that it faced. Shareholders
are being asked to ratify the grant of such conditional Hemosol Options at the
Meeting. See "Annual Meeting and Other Special Business -- Ratification of
Conditional Grants of Options".
MUTUAL CONDITIONS
The obligations of Hemosol and MDS to complete the transactions
contemplated in the Arrangement Agreement are subject to certain mutual
conditions, including the following:
(a) the Interim Order has been granted;
(b) any conditions which may be imposed by the Interim Order have been
satisfied;
(c) the Arrangement Resolution has been approved by the Securityholders at
the Meeting as described under "-- Securityholder Approvals" below, in
accordance with the Interim Order;
(d) the Final Order has been granted, as described under "-- Court
Approval" below;
(e) all consents and approvals of governmental entities required for the
completion of the transactions contemplated under the Arrangement
Agreement have been obtained (including approval from the TSX, NASDAQ,
the Department of National Defence and the MOH); and
(f) the consent of the Bank has been obtained.
39
CONDITIONS IN FAVOUR OF HEMOSOL
In addition to the mutual conditions summarized above, the obligation of
Hemosol to complete the transactions contemplated in the Arrangement Agreement
is subject to certain customary and other conditions, including the following:
(a) subject to the release by the Bank of MDS under the MDS Guarantee, MDS
will have entered into the BPP Guarantee; and
(b) there will not have occurred, developed or arisen or come into effect
or existence any condition, event or development which in the
reasonable judgment of Hemosol has, or is reasonably likely to have, a
Material Adverse Effect (as that term is defined in the Arrangement
Agreement) on the Labs Business.
CONDITIONS IN FAVOUR OF MDS
In addition to the mutual conditions summarized above, the obligation of
MDS to complete the transactions contemplated in the Arrangement Agreement is
subject to certain customary and other conditions, including the following:
(a) there will not have occurred, developed or arisen or come into effect
or existence any condition, event or development which in the
reasonable judgment of MDS has, or is reasonably likely to have, a
Material Adverse Effect (as that term is defined in the Arrangement
Agreement) on Hemosol;
(b) there will not be any change in the Plan of Arrangement that would
result in any Hemosol Convertible Securities and Hemosol Options being
issued and outstanding upon completion of the Arrangement;
(c) there will not be any change, condition, event or development in
respect of Hemosol or the Blood Products Business that would result in
any material impairment in, or materially adversely affect the ability
of Labco to utilize, the Tax Losses after the Effective Time as
contemplated in the Tax Ruling;
(d) MDS will have obtained any amendments or supplements to the Tax Ruling
deemed necessary by its counsel or financial advisors in order to
implement the Plan of Arrangement and the Arrangement Agreement and to
allow Labco to utilize the Tax Losses after the Effective Time, as
contemplated in the Tax Ruling; and
(e) there will 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's view, acting reasonably, could
result in any material impairment in or materially adversely affect
the Tax Ruling or the ability of Labco to utilize the Tax Losses after
the Effective Time as contemplated in the Tax Ruling or result in a
material adverse change in the tax treatment on any dividends to be
received by MDS as a shareholder of Labco or otherwise reduce
(otherwise than as a consequence of a general reduction in income tax
rates) the benefit to Labco or MDS of Labco utilizing the Tax Losses.
NON-SOLICITATION
In the Arrangement Agreement, Hemosol has agreed that it will not (i)
solicit, initiate or encourage any inquiries or proposals regarding any merger,
amalgamation, arrangement, restructuring, take-over bid, sale or purchase of
substantial assets (including, without limitation, tax carryforward balances),
sale or purchase of securities (other than certain exceptions), business
combinations, reorganizations or recapitalizations (an "Acquisition Proposal")
or (ii) participate in any discussions or negotiations regarding, or furnish to
any person any information with respect to any of the foregoing.
Hemosol may respond to an unsolicited bona fide written Acquisition
Proposal which the Hemosol Board determines in good faith and in the proper
discharge of its fiduciary duties would, if consummated in accordance with its
terms, result in a transaction that is more favourable to the Shareholders
generally (without taking into account any benefits that MDS and its affiliates
may receive under the Arrangement) than the Arrangement (a "Superior Proposal").
TERMINATION AND EXPENSE REIMBURSEMENT
The Arrangement Agreement may be terminated at any time prior to the
Effective Date by mutual written consent of Hemosol and MDS. In addition, the
Arrangement may be terminated at any time prior to the Effective Date by Hemosol
or MDS if (i) the Securityholders do not vote to approve the Arrangement
Resolution at the
40
Meeting or (ii) the Arrangement is illegal or if any final and non-appealable
judgment, injunction, order or decree of a court or regulatory authority is
issued that prohibits MDS or Hemosol from proceeding with the Arrangement.
The Arrangement Agreement may also be terminated by:
(a) MDS as a result of a breach by Hemosol of any of its representations
or warranties or covenants under the Arrangement Agreement and such
breach is not cured within three days after notice;
(b) MDS if (i) the Hemosol Board has modified or amended in a manner
adverse to MDS or withdrawn its recommendation that the
Securityholders approve the Arrangement, (ii) the Hemosol Board has
approved or recommended any Superior Proposal, or (iii) Hemosol has
entered into a binding agreement with respect to a Superior Proposal;
(c) Hemosol upon its determination that an Acquisition Proposal
constitutes a Superior Proposal; or
(d) Hemosol or MDS if the Effective Date does not occur on or prior to the
Outside Date, provided that certain conditions to closing relating to
actions to be taken by Hemosol have not been fulfilled,
in which case Hemosol will pay to MDS an amount equal to $1 million in respect
of expenses incurred by MDS in connection with matters related to the
Arrangement Agreement.
The Arrangement Agreement may also be terminated by:
(a) Hemosol as a result of a breach by MDS of any of its representations,
warranties or covenants under the Arrangement Agreement and such
breach is not cured within three days after notice;
(b) Hemosol or MDS if the Effective Date does not occur on or prior to the
Outside Date, provided that certain conditions to closing relating to
actions to be taken by MDS have not been fulfilled; or
(c) MDS if CCRA has refused to issue an amendment or supplement to the Tax
Ruling deemed necessary by its counsel or financial advisors in order
to implement the Arrangement and to allow Labco to utilize the Tax
Losses after the Effective Date as contemplated in the Tax Ruling, or
there is a change in tax law that could result in any material
impairment in or materially adversely affect the Tax Ruling or the
ability of Labco to utilize the Tax Losses after the Effective Date as
contemplated in the Tax Ruling,
in which case MDS will pay to Hemosol an amount equal to $0.5 million in respect
of expenses incurred by Hemosol in connection with matters related to the
Arrangement Agreement.
OTHER TERMS OF THE ARRANGEMENT AGREEMENT
In addition to setting out certain transactions leading up to the
Arrangement and the Plan of Arrangement and the conditions precedent to its
completion, as described in this Circular, the Arrangement Agreement also
contains customary representations and warranties by each of the parties,
including corporate, legal and other matters relating to their respective
affairs and to the Arrangement, and includes covenants by each of the parties to
do all such things as may reasonably be required to carry out the Arrangement
and to use commercially reasonable efforts to fulfil the conditions precedent.
ESCROW AGREEMENT
The Escrow Agreement will be entered into between New Hemosol, Labco and an
escrow agent (the "Escrow Agent"). Under the Escrow Agreement, at the Effective
Time, New Hemosol will deposit the Escrow Amount in a segregated interest
bearing account established for such purpose by the Escrow Agent. The Escrow
Amount will be retained by the Escrow Agent until all indemnifiable claims made
by Labco under the Labco Indemnity Agreement (each, a "Claim") within one year
following the Effective Date (the "Claim Period") have been resolved by
agreement between Labco and New Hemosol or have become subject to a final
non-appealable order of a court having jurisdiction over the matter in dispute.
In the event of any Claims by Labco under the Labco Indemnity Agreement,
Labco will deliver a notice (the "Claim Notice") to the Escrow Agent and New
Hemosol within 15 business days of the expiry of the Claim Period identifying
all Claims that have arisen within the Claim Period. Upon receipt of a Claim
Notice, the Escrow Agent will pay out to Labco the full amount of all Claims on
the 20th business day following receipt of the Claim Notice, unless New Hemosol
objects in writing within such 20-business day period. If New Hemosol objects to
any Claim, the Escrow Agent will not release the funds in the escrow account
until it has received either a joint direction of
41
New Hemosol and Labco to release the applicable funds or a final non-appealable
order of a court having jurisdiction over the matter in dispute.
On the expiry of the 15-business day period following the Claim Period,
provided that Labco has either not delivered a Claim Notice or Labco has
delivered a Claim Notice and the Claims subject to the Claim Losses aggregate
less than $1 million, the Escrow Agent will release to New Hemosol the funds in
the escrow account less an amount equal to the aggregate amount of all Claims
identified in any Claim Notice, together with accumulated interest on such
aggregate amount. Any amount retained by the Escrow Agent will be dealt with as
described above, and upon the final resolution of all Claims and all payments in
respect thereof, if any, have been made by the Escrow Agent to Labco, the Escrow
Agent will release the balance of the escrow account, if any, to New Hemosol.
INDEMNITY AGREEMENTS
Under the terms of the MDS Indemnity Agreement, New Hemosol has agreed to
indemnify MDS against certain losses that MDS may incur or suffer in certain
circumstances, including in the event that (i) the amount of the Tax Losses has
been overstated or an acquisition of control of Hemosol has occurred prior to
the Effective Time, (ii) there is a misrepresentation or omission of a material
fact in connection with submissions regarding Hemosol made to CCRA in the
application for the Tax Ruling, the Tax Ruling or the Supplemental Submissions
or (iii) there are certain adverse tax related consequences of the Arrangement.
The ability of MDS to make claims under the MDS Indemnity Agreement is subject
to certain limits on the amounts of potential claims and the maximum aggregate
liability of New Hemosol under the MDS Indemnity Agreement will not exceed $16
million.
Under the terms of the Labco Indemnity Agreement, the Blood Products
Partnership has agreed to indemnify Labco against losses that Labco may incur or
suffer relating to an act or omission of Hemosol prior to the Effective Time,
including an act or omission in connection with any clinical, pre-clinical and
other studies and tests conducted by or on behalf of Hemosol or a Subsidiary
prior to the Effective Time, the operation of the Blood Products Business and
the care and maintenance of the Blood Products Assets after the Effective Time,
including failure by the Blood Products Partnership to satisfy the Blood
Products Liabilities or perform its obligations under the contracts to which
Hemosol was party immediately prior to the Effective Time or any loss relating
to any non-assignable contracts of Hemosol. Labco will not be entitled to make
any claim against the Blood Products Partnership unless the aggregate amount of
losses incurred by Labco exceeds $50,000, in which case such claim, including
the initial $50,000 amount, may be recovered by Labco. There is no limitation on
the amount that may be claimed by Labco under the Labco Indemnity Agreement.
SECURITYHOLDER APPROVALS
For the Arrangement to be implemented, the Arrangement Resolution must be
passed, with or without variation, by:
(a) at least two-thirds of all the votes cast by Securityholders voting
together as a single class, in person or by proxy, at the Meeting; and
(b) a majority of all the votes cast by Minority Shareholders voting, in
person or by proxy, at the Meeting. As discussed in more detailed
under the heading "Regulatory Matters -- OSC Rule 61-501 and AMF
Policy Q-27", this reflects the requirement for minority approval of
the Arrangement as a "going private transaction" and a "related party
transaction" under Rule 61-501 and Policy Q-27. To the knowledge of
Hemosol, for purposes of the minority approval requirement, the
Minority Shareholders are comprised of all Shareholders except MDS,
MDS Health Ventures (TC) Inc. and two entities for which MDS Capital
Corp. and/or its affiliates provide management services who as at
March 10, 2004 held an aggregate of 7,362,143 Hemosol Shares. A
breakdown of the Hemosol Shares held by MDS and its affiliates is
provided in the section "General Proxy Matters -- Voting Securities
and Principal Holders Thereof" of this Circular.
COURT APPROVAL
The Arrangement requires Court approval under the OBCA. The court
proceeding necessary to obtain that approval was commenced on March 8, 2004 by
Notice of Application in the Ontario Superior Court of Justice. The Notice of
Application is set forth in Annex B to this Circular. Prior to the mailing of
this Circular, the Interim
42
Order was granted on March 9, 2004 providing for the calling and holding of the
Meeting and certain other procedural matters. A copy of the Interim Order is set
forth in Annex C to this Circular.
The Interim Order does not require that dissent rights be granted to
Securityholders and therefore, no such dissent rights have been granted.
Following approval of the Arrangement by the Securityholders and the
Minority Shareholders, an application will be made to the Court for the Final
Order, which application has been scheduled to be heard at 10:00 a.m. (Toronto
time) on April 22, 2004 in the Court at 393 University Avenue, Toronto, Ontario.
The Court in hearing the motion for the Final Order will consider, among other
things, the fairness and reasonableness of the Arrangement. The Court may
approve the Arrangement either as proposed or as amended in any manner the Court
may direct, subject to compliance with such terms and conditions, if any, as the
Court thinks fit. At the hearing in respect of the Final Order, any
Securityholder and any other interested party who wishes to participate or to be
represented or to present evidence or argument may do so, subject to filing a
notice of appearance as set out in the Notice of Application and satisfying
certain other requirements as set out in the Interim Order.
The Final Order will constitute a basis for an exemption from certain
registration requirements of the U.S. Securities Act with respect to the
securities of New Hemosol and Labco issued pursuant to the Arrangement.
TORONTO STOCK EXCHANGE AND NASDAQ LISTINGS
New Hemosol has applied to have the New Hemosol Shares listed on the TSX
(symbol "HML"). It is a condition of the Arrangement becoming effective that the
New Hemosol Shares be approved for listing on the TSX and quoted on NASDAQ,
respectively, subject to normal requirements of TSX and NASDAQ, respectively.
The TSX has given conditional approval for the substitutional listing of the New
Hemosol Shares (and the Labco Class C Shares at the Effective Time) on the TSX,
subject to its normal requirements. Upon completion of the Arrangement, it is
expected that the New Hemosol Shares will be quoted on NASDAQ. New Hemosol will
be a reporting issuer in Canada and a registrant in the U.S. following
completion of the Arrangement.
Neither the Labco Class A Shares nor the Labco Class B Shares will be
listed or posted for trading on the TSX or any other exchange or market.
Following completion of the Arrangement, Labco will continue to be a reporting
issuer in Canada and a registrant in the U.S.
DISTRIBUTION OF SHARE CERTIFICATES
On and after the Effective Time until the close of business on the fifth
Trading Day (as defined below) following the Effective Date, certificates
formerly representing Hemosol Shares will represent only the right to receive
New Hemosol Shares and Labco Class A Shares in accordance with the Arrangement.
Following the close of business on the fifth Trading Day following the Effective
Date, such certificates will cease to represent any claim or interest, including
a claim for dividends or other distributions, against Labco or New Hemosol.
As soon as practicable, certificates representing New Hemosol Shares and
Labco Class A Shares will be mailed to those Shareholders whose names appear on
the register of Shareholders at the close of business on the fifth Trading Day
following the Effective Date.
On and after the Effective Time, (i) the agreements providing for the
Hemosol Options will represent only the right to receive the New Hemosol Options
to which the holders thereof are entitled under the Arrangement and (ii) the
agreements providing for the Hemosol Convertible Securities will represent only
the right to exercise into New Hemosol Shares and/or New Hemosol Convertible
Securities, as contemplated under the Arrangement.
In this section, "Trading Day" means a day, other than a Saturday or
Sunday, when the TSX and NASDAQ are open for trading.
ELIGIBILITY FOR INVESTMENT IN CANADA
In the opinion of DWPV, the Labco Class A Shares received in exchange for
Hemosol Shares will be qualified investments under the Tax Act for trusts
governed by a registered retirement savings plan, a registered retirement income
fund, a registered education savings plan and a deferred profit sharing plan and
the New Hemosol Shares issued in exchange for Labco Class C Shares will be
qualified investments for such trusts provided the New Hemosol Shares are listed
on a prescribed stock exchange in Canada. Neither the Labco Class A Shares nor
the New Hemosol Shares would, if issued on the date hereof, be foreign property
for purposes of Part XI of the Tax Act.
43
SOURCE OF FUNDS
As part of the Arrangement, New Hemosol will receive from Labco $16 million
in cash proceeds as partial consideration for the redemption of the Labco Class
C Shares. Labco will borrow such funds from the Labs Partnership (pursuant to a
loan bearing interest at a commercial rate with a maturity date of May 31, 2005)
and the Labs Partnership will in turn borrow such funds from MDS (pursuant to a
non-interest bearing loan with a maturity date of May 31, 2005). MDS will fund
that amount from its operating income.
EXPENSES OF THE ARRANGEMENT
The total estimated expenses of the Arrangement to be incurred by Hemosol
and MDS are as follows:
<Table>
Accounting and advisory fees and expenses................... $1.1 million
Legal fees and expenses..................................... $2.6 million
Printing, mailing and proxy solicitation fees, meeting
expenses, filing fees and transfer taxes.................. $0.7 million
</Table>
All fees and expenses in connection with the Arrangement Agreement and the
transactions contemplated thereby, including legal, financial and accounting
advisory fees, will be paid by the party incurring such fees and expenses.
However, if the Arrangement is completed, MDS will reimburse Hemosol or New
Hemosol, as applicable, for 50% of the fees and expenses (including the fees and
expenses of legal advisors, printing expenses and stock exchange and other
regulatory fees) incurred by Hemosol or New Hemosol in connection with the
preparation and mailing of the Circular, the application for the Interim Order
and the Final Order, the holding of the Meeting, the preparation for (to the
extent that such preparation is after the date of the Arrangement Agreement) and
closing of the transactions contemplated in the Arrangement Agreement, up to a
maximum reimbursement of $300,000.
Of the total estimated expenses of approximately $4.4 million,
approximately $2.2 million have been or will be incurred by Hemosol and have
been or will be borne by Hemosol, New Hemosol and/or the Blood Products
Partnership, without taking into account any expense reimbursement by MDS as
described above.
ACCOUNTING TREATMENT OF THE ARRANGEMENT
As the successor of Hemosol, New Hemosol will consolidate the balance sheet
and operating results of the Blood Products Partnership using Hemosol's
historical accounting basis. All assets and liabilities of Hemosol will flow
through to New Hemosol under Hemosol's existing accounting policies. The 7%
interest in the Blood Products Partnership retained by Labco will be accounted
for as a minority interest in New Hemosol. The $16 million cash proceeds that
New Hemosol will receive pursuant to the Arrangement, as well as 0.44% of Labco,
will be accounted for as a gain in the accounts of New Hemosol, net of
transaction costs and the value of the 7% interest in the Blood Products
Business. The surrender of 500,000 Tranche A Warrants will be accounted for as a
reduction in share capital with an offsetting increase to contributed surplus.
Under Canadian GAAP, Labco will utilize equity accounting to account for
its investment in the Labs Partnership and the cost method to account for its
investment in the Blood Products Partnership.
AGREEMENT OF MDS TO VOTE IN FAVOUR OF THE ARRANGEMENT
Under the Arrangement Agreement, MDS has agreed that it will vote its
Hemosol Shares and cause its subsidiaries to vote their Hemosol Shares in favour
of the Arrangement Resolution.
INTERESTS OF CERTAIN PERSONS IN THE ARRANGEMENT
Collectively, directors and executive officers of Hemosol beneficially own
196,055 Hemosol Shares, which constitutes less than 1% of the issued and
outstanding Hemosol Shares, and 4,036,393 Hemosol Options (including Hemosol
Options granted on October 29, 2003 and December 11, 2003 conditionally upon
Shareholder and regulatory approval) and 12,500 Hemosol Warrants, which
securities will be treated in accordance with the Plan of Arrangement. Except as
otherwise disclosed in this Circular, no director or executive officer of
Hemosol nor any affiliate of any of the foregoing persons has any material
interest, direct or indirect, by way of beneficial ownership of securities or
otherwise in any matter to be acted upon at the Meeting, except for any interest
arising from the direct or indirect ownership of Hemosol Shares or Hemosol
Options.
44
MDS has been a major shareholder of Hemosol and has had representation on
the Hemosol Board since Hemosol was incorporated in 1985. Currently, of the ten
directors on the Hemosol Board, four are related to MDS by virtue of being
directors, officers or employees of MDS or its affiliates. These directors are
R. Ian Lennox, Wilfred G. Lewitt, Edward K. Rygiel and Nelson M. Sims, each of
whom abstained from voting on the resolution of the Hemosol Board authorizing
the Arrangement Agreement and the transactions contemplated thereby, as required
by the OBCA. In the past two years, MDS, through its representatives on the
Hemosol Board, has been indirectly aware of material events and transactions
affecting Hemosol.
To the knowledge of the management of Hemosol, each of the directors and
executive officers of Hemosol currently intends to vote the Hemosol Shares owned
or controlled by him in favour of the Arrangement Resolution for the reasons set
forth in this Circular. Other than the recommendation of the Hemosol Board
disclosed in this Circular, no director or executive officer of Hemosol or MDS
has made a recommendation in support of or opposed to the Arrangement.
Hemosol has no knowledge as to whether any of the directors and officers of
MDS (other than any director of Hemosol) currently intends to vote the Hemosol
Shares, if any, owned or controlled by such person, in favour of the Arrangement
Resolution.
Hemosol has retained KPMG to be financial advisors to the Independent
Committee with respect to the Arrangement. KPMG has received and will receive
fees from Hemosol for services rendered. E&Y, tax advisors to Hemosol, will
receive fees from Hemosol for services rendered.
HEMOSOL PRIOR TO THE ARRANGEMENT
Hemosol is a biopharmaceutical company focused on the discovery,
development and manufacture of products based on human blood proteins. Hemosol
has a range of products in development, including its principal oxygen
therapeutic product, HEMOLINK. HEMOLINK is a highly purified, human-derived
oxygen therapeutic product (historically termed a blood substitute) designed to
sustain life by delivering oxygen immediately, effectively, and safely,
resulting in improved patient outcomes and to eliminate the need for donor red
blood cell transfusions in patients suffering from acute anemia. Hemosol is also
developing additional therapeutics and a hemoglobin-based delivery platform to
treat diseases such as hepatitis C and cancers of the liver, as well as a cell
therapy initially directed to the treatment of cancer through its cell expansion
and stem cell research activities. In addition to the products currently under
development, Hemosol intends to use its state-of-the-art Hemolink Building to
produce valuable therapeutic plasma-based proteins pursuant to a recently
announced strategic alliance with ProMetic. See "-- Strategic Alliance with
ProMetic" below. Hemosol also continues to advance a number of initiatives to
generate revenue in the near-term through the provision of blood related
bio-manufacturing services to biotechnology and biopharmaceutical companies. See
"-- Bio-Manufacturing Services" below.
Hemosol was incorporated under the OBCA by articles of incorporation dated
July 11, 1985. Hemosol's registered and principal office is located at 2585
Meadowpine Boulevard, Mississauga, Ontario, Canada L5N 8H9 and the telephone
number for this office is (905) 286-6200.
CLINICAL TRIALS AND NON-CLINICAL ANALYSES
In March 2003, following the receipt of information from Hemosol's Data
Safety Monitoring Board (the "DSMB") for the Phase II clinical trial for the use
of HEMOLINK in primary cardiac bypass grafting ("CABG") surgery (HLK213/304),
Hemosol elected to halt enrolment of patients in the study at 152 patients
(slightly lower than the originally planned enrolment of 180 patients) pending a
review of safety data. The DSMB's comments were based on an observation of an
imbalance in the incidence of certain adverse events between the HEMOLINK and
control groups. Although the DSMB had recently cleared the trial to continue
following the third and final interim safety review, its ongoing review of data
indicated that there might be potential for an increase in certain cardiac
adverse events in the HEMOLINK group. As a precaution, Hemosol also voluntarily
suspended enrolment in the Phase II clinical trial involving the use of HEMOLINK
in patients undergoing high blood loss orthopaedic surgery. At the time of these
suspensions, Hemosol had received approval from the U.S. Food & Drug
Administration (the "FDA") to conduct two additional phase II trials in the U.S.
- -- HLK 211 chemotherapy related anemia trial and HLK 299 severe acute anemia
trial.
45
In June 2003, Hemosol completed its internal review of data generated from
the cardiac trial (HLK213/304) for the use of HEMOLINK in patients undergoing
CABG surgery. The review confirmed the observation made by the DSMB of an
imbalance of the incidence of certain adverse events between the HEMOLINK and
control groups with a higher number occurring in the HEMOLINK group. It is
unclear what role HEMOLINK played in causing the imbalance. As expected,
limiting enrolment decreased the planned statistical power of the study with
respect to efficacy, and the study was unable to meet its primary objective to
demonstrate efficacy in the total patient population.
Hemosol elected to terminate the HLK213/304 trial early in order to conduct
a full safety analysis and initiated a comprehensive process aimed at completely
understanding the data in the context of the observations made by the DSMB.
Among the elements of this process was the creation of an Independent Safety
Review Committee (the "ISRC") to review the safety data from HLK213/304 in order
to assist Hemosol in identifying the cause of the imbalances found by the DSMB.
The ISRC, which has already completed its task, was comprised of experts in
their respective fields of transfusion medicine, cardiology, anaesthesiology,
cardiac surgery and biostatics to review the safety data from HLK213/304. At the
same time, Hemosol's Scientific Advisory Board (the "SAB") undertook its own
evaluation of the safety data. Based on the final findings of the ISRC and the
SAB, Hemosol believes that it needs to complete additional non-clinical work
prior to re-initiating the clinical trials. This process is underway and will
involve further discussion with regulatory agencies. Hemosol has sufficient
inventory of HEMOLINK to complete all non-clinical studies. Hemosol does not
expect to expend significant amounts of its resources on this work and further
clinical and commercial development will depend on (i) the outcome of
discussions with the relevant regulatory agencies, (ii) financial resources
and/or (iii) the success of partnering activities.
Hemosol continues to advance non-clinical analysis on HEMOLINK that
includes both in vitro and in vivo studies. Hemosol intends to review its plans
with the FDA in 2004 with the objective of establishing agreement on the
clinical path for HEMOLINK in the fourth quarter of 2004. Hemosol has
significant knowledge in the area of oxygen therapeutics and continues to
believe that HEMOLINK may prove to be a valuable therapeutic to treat a variety
of indications including, anemia caused by chemotherapy or blood replacement for
patients with life threatening blood loss.
Following the decision to place HEMOLINK on clinical hold, Hemosol has
expanded its long-term strategic focus to include the discovery, development and
manufacture of a wide array of products derived from human blood proteins, as
evidenced by the strategic alliance with ProMetic for which a binding memorandum
of understanding was entered into between Hemosol and ProMetic in December 2003,
as described below.
MANAGEMENT AND EMPLOYEES
In April 2003, Hemosol took proactive steps to manage its cash burn-rate
and scale back all spending not related to the analysis of the HLK 213/304 data,
by giving eight weeks' working notice to substantially all of its employees. To
preserve the greatest strategic flexibility in the circumstances, retention
packages were provided to a core group of senior personnel. The cash cost of
these severances and the retention program was approximately $1.8 million. As a
result of its cost savings plan, Hemosol's average monthly cash burn-rate has
been reduced to approximately $1.2 million.
In May 2003, John Kennedy, at the time, President and Chief Executive
Officer of Hemosol, took a medical leave of absence for an indeterminate period
of time and Lee Hartwell, Chief Financial Officer of Hemosol, was appointed
Interim Chief Executive Officer. Mr. Kennedy passed away on June 4, 2003. Lee
Hartwell has subsequently been appointed Hemosol's President and Chief Executive
Officer while maintaining his position as Chief Financial Officer.
STRATEGIC ALLIANCE WITH PROMETIC
On December 4, 2003, Hemosol announced that it had entered into the
ProMetic MOU that will involve Hemosol licensing the novel plasma separation
technology developed by ProMetic and its strategic partner, the
46
American National Red Cross. The principal commercial terms of the proposed
strategic alliance, as set out in the ProMetic MOU, will include:
- Hemosol obtaining from ProMetic the exclusive North American licence for
the novel cascade purification process developed by ProMetic and the
American National Red Cross (the "Cascade") to recover valuable proteins
from human plasma;
- the implementation and optimization of the Cascade at the Hemolink
Building;
- Hemosol's exclusive right to sell products developed with the Cascade
into the North American market;
- the commitment in principle of the American National Red Cross that
following execution of a definitive licence agreement between Hemosol
and ProMetic with respect to the Cascade and the successful
implementation of the Cascade at the Hemolink Building, the American
National Red Cross will supply raw materials to Hemosol for processing
and purchase from Hemosol specific therapeutic products isolated using
the Cascade; and
- identifying, developing and exploiting commercial opportunities in
addition to those available from the use of the Cascade.
The Cascade was developed under an existing strategic alliance between
ProMetic and the American National Red Cross that was formed in February 2002 to
co-develop and license to third parties proprietary technology for the recovery
and purification of valuable therapeutic proteins from human blood plasma. The
Cascade process integrates novel technologies in a sequence which is expected to
significantly improve both the yield and range of valuable proteins capable of
being isolated from human plasma. The commercial drivers underlying Hemosol's
use of this technology are (i) the Cascade's ability to potentially narrow the
increasing gap between the growing demand for these products and the inherent
limitations in traditional fractionation methods and (ii) the opportunity the
technology provides to identify and recover novel therapeutic proteins which may
have significant commercial potential and which are not recoverable using
conventional plasma fractionation methods.
Hemosol expects to become the first licensee of this technology and its
exclusive user to manufacture products for sale into the North American market,
which is the largest single market for plasma-based proteins. Commercial sales
of therapeutic products manufactured using the Cascade will require the advance
approval of the applicable regulatory agency in each jurisdiction where sales
are contemplated.
In addition to full-scale commercial production in North America, Hemosol
believes it will be capable of securing interim and supplementary revenues by
supplying clinical trial material to future Cascade licensees worldwide. Under
the implementation schedule contemplated in the ProMetic MOU, Hemosol plans to
produce these clinical trial materials and receive interim revenues therefrom,
in advance of receiving regulatory approval for the large scale commercial
production and sale of products using the Cascade. Access to clinical material
by subsequent licensees of the Cascade will be key to accelerating the approval
processes for these products with the regulatory bodies in each subsequent
licensee's jurisdiction.
In addition to potentially providing Hemosol with the opportunity to
participate in the existing and growing market for therapeutic proteins with
products that have demonstrated strong demand, Hemosol believes that the
strategic alliance with ProMetic will also enhance Hemosol's ongoing development
of oxygen therapeutics, such as HEMOLINK, as well as other products in Hemosol's
drug development pipeline. Hemosol believes the strategic alliance will not
interfere with current development programs for HEMOLINK or with Hemosol's
objective to establish the clinical path forward for HEMOLINK in the fourth
quarter of 2004.
As consideration for ProMetic entering into the binding ProMetic MOU and
the commencement of implementation activities by the parties, Hemosol issued
2,000,000 Hemosol Shares to ProMetic. Hemosol has also agreed to pay ProMetic a
staged licence fee with a maximum aggregate value of $15.5 million and the
issuance by Hemosol of 1,000,000 Hemosol Shares. Discrete payments of this
staged licence fee will be due and payable by Hemosol to ProMetic following the
execution of a definitive licence agreement and upon the achievement of four
separate predetermined technical and regulatory milestones at approximately
equal intervals over the next four years. The first milestone will be the
execution of a definitive licence agreement that will trigger a cash payment of
$1.5 million and the obligation of Hemosol to issue 1,000,000 Hemosol Shares to
ProMetic, subject to regulatory approval. Hemosol and ProMetic are working to
achieve this preliminary milestone during the first quarter of 2004.
47
The final milestone payment will consist of $5 million and will be triggered by
the receipt of regulatory approval for the commercial sale of the first product
produced using the Cascade.
In addition to the licence fee, the ProMetic MOU also provides that Hemosol
will pay ProMetic royalty fees of 8% of net sales of products isolated using the
Cascade to resellers and a royalty of 5% of net sales of products isolated using
the Cascade to end-users, both on a worldwide basis.
BIO-MANUFACTURING SERVICES
Hemosol is actively pursuing opportunities to generate revenues and reduce
its cash burn over the short to mid-term by using the Hemolink Building to
provide bio-manufacturing services to companies in the biotechnology and
biopharmaceutical sectors focused in the area of blood and blood protein
products. Hemosol believes there is considerable demand for the services that
Hemosol can offer by combining its Hemolink Building with the considerable
experience Hemosol's employees can provide with respect to the manufacture of
blood-related products.
OTHER PRODUCTS
Hemosol has a diverse pipeline of new product candidates, several of which
are now undergoing pre-clinical evaluation. These product candidates have been
developed using technologies that are based upon the expertise of Hemosol's
scientists in protein bioconjugation and cell expansion. HEMOLINK is one example
of protein bioconjugation in which human hemoglobin, a protein, has been
stabilized and polymerized using o-raffinose, a cross-linker. Other types of
hemoglobin conjugates in development include conjugates of hydroxyethyl starch,
anti-oxidants, and therapeutic drugs.
As a means of establishing its own source of human hemoglobin, Hemosol has
been conducting discovery research in expanding human blood-forming stem cells
through cell culture. These efforts have led to methods to induce an established
cell line to produce high levels of human hemoglobin, as well as the development
of a T cell therapy for the treatment of cancer. The identification of factors
affecting blood cell growth and development are the direct result of Hemosol's
activities in stem cell research.
PROPERTY
On January 29, 2003, Hemosol entered into an amended and restated lease for
a term of eight years and 11 months from and including August 1, 1997 and
terminating on June 30, 2006 with respect to Hemosol's Skyway facility. Hemosol
subsequently determined that the Skyway facility was no longer required for the
execution of Hemosol's business strategy and, on December 1, 2003, Hemosol
terminated its lease and sublease obligations and sold the equipment located at
the Skyway facility for net proceeds of $1.1 million.
SIGNIFICANT CORPORATE TRANSACTIONS
Other than the transactions contemplated by the Arrangement Agreement,
neither MDS nor any of its directors or executive officers has been involved in
any negotiations, or a party to any transaction or material contract, with
Hemosol concerning a merger, consolidation, acquisition, tender offer for
Hemosol's securities, election of Hemosol directors or a sale or other transfer
of a material amount of Hemosol's assets. Similarly, except as disclosed
elsewhere in this Circular, neither Hemosol nor any of its directors or
executive officers has been involved in any negotiations, or a party to any
material contract, with any other person concerning a merger, consolidation,
acquisition, tender offer for Hemosol's securities, election of Hemosol
directors or a sale or other transfer of a material amount of Hemosol's assets.
CREDIT FACILITY
On October 25, 2002, the Bank extended the Bank Loan to Hemosol. Hemosol's
obligations in connection with the Bank Loan are secured by a fixed and floating
first charge in favour of the Bank over all of Hemosol's real and personal
property assets. The Bank Loan replaced Hemosol's undrawn $35 million senior
credit facility which had a $15 million cash collateral requirement. The terms
of the Bank Loan include less restrictive covenants and interest at the reduced
rate of prime plus 1% per annum, or a bankers' acceptance fee of 2% per annum,
compared to prime
48
plus 3% per annum for the unused senior credit facility. As a result, Hemosol
formally terminated the senior credit facility on November 22, 2002. In
addition, an unused $12.5 million subordinate credit facility was also formally
terminated on November 22, 2002. Total deferred debt issue costs of
approximately $6.5 million were written off during the 2002 fiscal year as a
result of the cancellation of the $35 million senior and $12.5 million
subordinate credit facilities. These costs represented both cash and non-cash
items.
The Bank Loan, which is fully drawn, was initially to expire on May 25,
2004, but was extendible for up to an additional twelve-month period. On October
22, 2002, Hemosol entered into the MDS MOU, pursuant to which MDS agreed to
enter into the MDS Guarantee to guarantee the Bank Loan. Under the MDS
Guarantee, the Bank agreed to request payment from MDS prior to exercising its
remedies under the security granted by Hemosol and MDS would be subrogated to
and take an assignment of the rights and remedies of the Bank under the Bank
Loan and the security granted by Hemosol in connection with the Bank Loan.
As consideration for providing the MDS Guarantee, Hemosol issued the
Tranche A Warrants to MDS. Each Tranche A Warrant entitles MDS to subscribe for
and purchase one Hemosol Share at a price of $1.00. 5,000,000 Tranche A Warrants
are exercisable, in whole or in part, from and after the date upon which the MDS
Guarantee was delivered by MDS (the "Guarantee Date") and prior to the later of
the third anniversary of the Guarantee Date and, if the Bank Loan is not repaid
within 15 months of the Guarantee Date (the "Initial Term"), twelve months
following the date upon which the Bank Loan is repaid in full. For each whole or
part month that the Bank Loan remains outstanding beyond the Initial Term (to a
maximum of three additional months) (each such whole or part month being an
"Extension Month"), MDS may exercise warrants entitling it to subscribe for
333,333 Hemosol Shares at any time and from time to time during the period from
and after the first day of the subject Extension Month and prior to the third
anniversary of such date. As the Initial Term expired on January 22, 2004, on
February 22, 2004, MDS became entitled to exercise 333,333 Tranche A Warrants in
addition to the 5,000,000 Tranche A Warrants that were exercisable prior
thereto. If the 5,333,333 Tranche A Warrants which are immediately exercisable
as of the date hereof were to be exercised, MDS would directly or indirectly
control 11,883,230 Hemosol Shares, representing 21.2% of the Hemosol Shares
issued and outstanding as of the date of this Circular. If the Bank Loan is not
repaid by Hemosol by the expiry of the Initial Term and the Bank Loan remains
outstanding for an additional three months, up to 1,000,000 of the issued
Tranche A Warrants would become exercisable. If all of the 6,000,000 Tranche A
Warrants become exercisable and are exercised by MDS, MDS would hold 12,549,897
Hemosol Shares, representing 22.4% of the Hemosol Shares issued and outstanding
as of the date hereof. Under the Arrangement, MDS will surrender one-half of the
1,000,000 Tranche A Warrants which will reduce by one-half the number of Tranche
A Warrants that become exercisable during each Extension Month.
The original MDS MOU contemplates that, in the event that regulatory
approval is obtained to issue an additional 4,000,000 Tranche B Warrants to MDS
on a date which is at least six months from the Guarantee Date to entitle MDS to
subscribe for and purchase up to 4,000,000 Hemosol Shares at a price of $1.00
per Hemosol Share, the Bank Loan may be extended for up to twelve additional
months (to a maximum of 30 months in the aggregate). In such case, Hemosol will
issue 4,000,000 Tranche B Warrants to MDS following receipt of regulatory
approval to do so. For each whole or part month that the Bank Loan remains
outstanding beyond 18 months (to a maximum of twelve additional months) (each
such whole or part month being an "Additional Extension Month"), MDS may
exercise Tranche B Warrants entitling it to subscribe for 333,333 Hemosol Shares
(333,337 in the final Additional Extension Month, to reach a total of 4,000,000)
at any time and from time to time during the period from and after the first day
of the subject Additional Extension Month and prior to the earlier of the third
anniversary of such date and the fifth anniversary of the Guarantee Date. Under
the Arrangement, MDS will surrender one-half of the 4,000,000 Tranche B Warrants
which will reduce by one-half the number of Tranche B Warrants that become
exercisable during each Additional Extension Month.
In December 2003, MDS agreed to extend the MDS Guarantee from June 15, 2004
to October 21, 2004, and the Bank agreed to extend the expiry date of the Bank
Loan from May 25, 2004 to October 1, 2004. In the event that the Tranche B
Warrants are issued to MDS by August 25, 2004 (Shareholder approval for such
issuance having been obtained at the January Special Meeting), the MDS Guarantee
will extend to June 20, 2005, in which case the Bank Loan will be repayable on
May 25, 2005. In the event that the Tranche B Warrants are not issued to MDS by
August 25, 2004, MDS will have the option of terminating the MDS Guarantee, in
which case the Bank Loan will be repayable on October 1, 2004.
49
CLINICAL TRIAL SUPPORT SERVICES
In 2002 and 2003, a wholly-owned subsidiary of MDS provided clinical trial
support services to Hemosol in connection with the HEMOLINK clinical trials.
Hemosol paid MDS approximately $123,000 in 2002 and $43,000 in 2003 for these
services. The fees for these services were negotiated on an arm's-length basis.
NASDAQ LISTING QUALIFICATIONS PANEL HEARING
On October 23, 2003, Hemosol received a NASDAQ staff determination
indicating that Hemosol was not in compliance with the minimum bid price of
US$1.00 per Hemosol Share which is a requirement for continued listing on
NASDAQ. Since Hemosol was not able to achieve compliance with this requirement
during the six-month period ended October 22, 2003, NASDAQ staff indicated that
the Hemosol Shares were subject to delisting from NASDAQ. Subsequently,
beginning December 4, 2003, Hemosol achieved a minimum bid price on NASDAQ above
the US$1.00 per share minimum bid price requirement. Consequently, on December
19, 2003, NASDAQ staff notified Hemosol that it had regained compliance with
NASDAQ's minimum bid price requirement and was no longer subject to delisting
for its past failure to meet this requirement.
SPECIAL WARRANT OFFERING
On November 28, 2003, Hemosol completed the issue and sale (the "Special
Warrant Offering") of 7,200,000 Series A special warrants (the "Series A Special
Warrants") and 641,800 Series B special warrants (the "Series B Special
Warrants", and together with the Series A Special Warrants, the "Special
Warrants") through Loewen, Ondaatje, McCutcheon Limited and Vengate Capital
Partners Company, as agents (collectively, the "Agents"). The Special Warrants
were issued at a purchase price of $0.75 per Special Warrant for gross proceeds
of $5,881,350. Each Special Warrant entitled the holder to acquire, at no
additional cost, one Hemosol Share and one-half of one Hemosol Warrant. Each
whole Hemosol Warrant entitles the holder thereof to purchase one Hemosol Share
at an exercise price of $0.90 per Hemosol Share at any time prior to November
28, 2006, unless the volume-weighted average share price of a Hemosol Share is
$2.25 or more for 20 consecutive trading days, in which case the Hemosol
Warrants must be exercised within 30 days of the date of notice by Hemosol of
such event.
For their services in connection with the Special Warrant Offering, the
Agents were paid a commission equal to 7% of the gross proceeds in respect of
the sale of the Special Warrants pursuant to the Special Warrant Offering. As an
additional fee to the Agents, Hemosol issued to the Agents broker warrants which
have been exercised into a total of 392,090 Broker Options. See "The Arrangement
- -- Treatment of Hemosol Convertible Securities in Connection with the
Arrangement".
Hemosol received gross proceeds of $5.4 million on closing of the Special
Warrant Offering on November 28, 2003, for the sale of 7,200,000 Series A
Special Warrants. The remaining proceeds of $481,350 in respect of the sale of
641,800 Series B Special Warrants were placed into escrow on the closing of the
Special Warrant Offering and released from escrow and paid to Hemosol after
receipt of shareholder approval to permit Hemosol to issue Hemosol Shares and
Hemosol Warrants underlying the Special Warrants as described below.
A final prospectus qualifying the distribution of: (i) up to 7,841,800
Hemosol Shares and up to 3,920,900 Hemosol Warrants issuable upon the exercise
of the Special Warrants and (ii) 392,090 Broker Options, was filed in Canada on
January 13, 2004 and receipted on January 15, 2004. Following Shareholder
approval at the January Special Meeting, both series of Special Warrants were
exercised, for no additional consideration, into 7,841,800 Hemosol Shares and
3,920,890 Hemosol Warrants, and the broker warrants of the Agents were
exercised, for no additional consideration, into Broker Options. See "-- January
Special Meeting" below.
Hemosol intends to use the net proceeds of the Special Warrant Offering to
finance the completion of the non-clinical analysis of HEMOLINK, the
implementation of Hemosol's contract bio-manufacturing strategy for the Hemolink
Building, the further development of product candidates and for general
corporate purposes.
50
JANUARY SPECIAL MEETING
PRIVATE PLACEMENT
A special meeting (the "January Special Meeting") of the Shareholders was
held on January 22, 2004 at which the Hemosol Shareholders adopted a resolution
authorizing Hemosol to issue or make issuable by private placement up to
23,051,892 additional Hemosol Shares (on a pre-consolidation basis), and more
specifically:
(a) subject to regulatory approval, the issuance by Hemosol of:
(i) 641,800 Hemosol Shares and 320,900 Hemosol Warrants on the
exercise of the 641,800 Series B Special Warrants; and
(ii) 32,090 Broker Options;
(b) subject to regulatory approval, the issuance by Hemosol to MDS of the
4,000,000 Tranche B Warrants; and
(c) subject to regulatory approval, the issuance by Hemosol in one or more
private placements during the twelve-month period commencing January
22, 2004 of such number of securities that would result in Hemosol
issuing or making issuable 18,041,057 Hemosol Shares (on a
pre-consolidation basis).
SHARE CONSOLIDATION
At the January Special Meeting, Shareholders also adopted a special
resolution approving an amendment to the articles of Hemosol to consolidate (the
"Share Consolidation") the issued and outstanding Hemosol Shares on the basis of
a ratio within the range of one post-consolidation Hemosol Share for every two
pre-consolidation Hemosol Shares to one post-consolidation Hemosol Share for
every four pre-consolidation Hemosol Shares, with the ratio to be selected and
implemented by the Hemosol Board in its sole discretion, at any time prior to
January 22, 2005.
If the Arrangement is completed, the Shareholders' authorization at the
January Special Meeting to allow Hemosol to effect the Share Consolidation will
carry forward, in effect, to New Hemosol. As a result, upon completion of the
Arrangement, the board of directors of New Hemosol will have the discretion to
carry out a share consolidation with respect to the New Hemosol Shares on the
same terms as the Share Consolidation at any time prior to January 22, 2005.
CONSOLIDATED CAPITALIZATION
Since December 31, 2002, the only material changes in Hemosol's share and
loan capital were: (i) aggregate draws of $20 million by Hemosol under the Bank
Loan, resulting in the Bank Loan being fully drawn; (ii) 2,000,000 Hemosol
Shares issued to ProMetic pursuant to the ProMetic MOU (see "Hemosol Prior to
the Arrangement -- Strategic Alliance with ProMetic"); (iii) pursuant to the
Special Warrant Offering, issuing up to 11,340,000 Hemosol Shares upon the
exercise of 7,200,000 Series A Special Warrants and the related Broker Warrants
and subsequently, 1,010,835 Hemosol Shares upon the exercise of 641,800 Series B
Special Warrants and the related Broker Warrants (see "-- Special Warrant
Offering" above); and (iv) the 2,766,225 Hemosol Options granted on October 29,
2003 and the 775,000 Hemosol Options granted on December 11, 2003, in each case
conditional upon Shareholder and regulatory approval (see "The Arrangement --
Treatment of Hemosol Options in Connection with the Arrangement" and "Annual
Meeting and Other Special Business -- Ratification of Conditional Grants of
Options").
51
PRICE RANGE AND TRADING VOLUME OF HEMOSOL SHARES
The Hemosol Shares trade on the TSX under the symbol "HML" and on the
NASDAQ under the symbol "HMSL". The following table sets forth the range of high
and low closing prices and trading volumes of the Hemosol Shares on the TSX and
NASDAQ for the periods indicated:
<Table>
<Caption>
TSX NASDAQ
--------------------------- -------------------------------
$ HIGH $ LOW VOLUME US$ HIGH US$ LOW VOLUME
------ ----- ---------- -------- ------- ----------
2002
First Quarter.......................... 9.38 3.65 11,971,775 5.90 2.40 1,712,400
Second Quarter......................... 4.78 2.07 9,281,844 3.05 1.37 719,500
Third Quarter.......................... 2.37 0.62 13,075,922 1.65 0.34 1,156,200
Fourth Quarter......................... 3.25 0.85 19,738,242 2.11 0.53 1,384,010
2003
January................................ 2.98 2.05 2,009,758 1.97 1.38 218,780
February............................... 2.42 2.00 758,618 1.70 1.30 158,350
March.................................. 2.35 0.51 11,850,445 1.60 0.33 1,133,850
First Quarter........................ 2.98 0.51 14,618,821 1.97 0.33 1,510,980
April.................................. 0.96 0.41 6,711,706 0.70 0.28 1,260,630
May.................................... 0.99 0.52 4,027,701 0.72 0.36 2,670,190
June................................... 1.80 0.68 15,607,770 1.35 0.50 19,814,400
Second Quarter....................... 1.80 0.41 26,347,177 1.35 0.28 23,745,220
July................................... 0.88 0.67 1,971,108 0.65 0.45 3,130,510
August................................. 1.23 0.72 5,005,712 0.89 0.50 11,528,760
September.............................. 1.20 0.85 6,299,328 0.89 0.61 11,285,900
Third Quarter........................ 1.23 0.67 13,276,148 0.89 0.45 25,945,170
October................................ 0.99 0.78 2,588,628 0.75 0.59 3,045,730
November............................... 0.87 0.69 3,579,553 0.66 0.52 4,247,530
December............................... 2.28 0.78 24,540,442 1.73 0.60 71,588,704
Fourth Quarter....................... 2.28 0.69 30,708,623 1.73 0.52 78,881,960
2004
January................................ 1.95 1.38 8,708,174 1.48 1.07 12,029,400
February............................... 1.86 1.38 4,427,093 1.40 1.01 4,329,560
March 1 to March 10.................... 1.60 1.39 1,333,871 1.23 1.04 1,613,800
</Table>
The closing price of the Hemosol Shares on the TSX and NASDAQ on February
11, 2004, the last trading day prior to the announcement by Hemosol of the
Arrangement Agreement, was $1.63 and US$1.25, respectively. The closing price of
the Hemosol Shares on the TSX and NASDAQ on March 9, 2004, the last trading day
prior to the date of this Circular, was $1.44 and US$1.08, respectively.
52
OWNERSHIP OF SECURITIES
The following table sets forth (i) the number of Hemosol Shares and (ii)
the total number of Hemosol Options and/or Hemosol Warrants and the number of
Hemosol Options that are exercisable within 60 days after March 1, 2004,
beneficially owned, directly or indirectly, or over which control or direction
is exercised, by each director and executive officer of Hemosol and, where known
after reasonable inquiry, by their respective associates, as at March 1, 2004.
All Hemosol Options held by directors and officers of Hemosol as described below
will be treated as part of the Arrangement. See "The Arrangement -- Treatment of
Hemosol Options in Connection with the Arrangement".
<Table>
<Caption>
TOTAL NUMBER OF
HEMOSOL OPTIONS PERCENTAGE OF
AND HEMOSOL HEMOSOL SHARES
WARRANTS/ PERCENTAGE OF HEMOSOL (DILUTED TO GIVE EFFECT
NUMBER OF HEMOSOL SHARES (DILUTED TO GIVE TO HEMOSOL OPTIONS
OPTIONS AND HEMOSOL EFFECT TO ALL HEMOSOL AND HEMOSOL WARRANTS
NUMBER OF WARRANTS EXERCISABLE OPTIONS AND HEMOSOL EXERCISABLE WITHIN
HEMOSOL WITHIN 60 DAYS AFTER WARRANTS HELD BY 60 DAYS AFTER
NAME SHARES(1) MARCH 1, 2004 DIRECTOR OR OFFICER)(2) MARCH 1, 2004)(3)
- ---- --------- -------------------- ----------------------- --------------------------
Mitchell J. Kostuch.......... 52,694 25,500(4)/19,164(5) 0.1392 0.1279
George W. Masters............ 34,786 13,000(6)/6,664 0.0850 0.0738
Robert H. Painter............ 10,192 13,000(7)/6,664 0.0412 0.0300
C. Robert Valeri............. 35,283 18,613(8)/12,277 0.0959 0.0847
R. Ian Lennox................ 0 7,000(9)/6,000 0.0125 0.0107
Edward K. Rygiel............. 0 5,000(10)/4,000 0.0089 0.0071
Wilfred G. Lewitt............ 0 5,000(11)/4,000 0.0089 0.0071
Edward E. McCormack.......... 0 10,000(12)/3,330 0.0178 0.0059
Nelson M. Sims............... 2,000 18,000(13)/9,324 0.0356 0.0202
Lee Hartwell................. 5,000 125,000(14)/93,977 0.2310 0.1760
David Bell................... 100 98,807(15)/82,127 0.1758 0.1462
Dirk Alkema.................. 46,000 99,998(16)/82,088 0.2529 0.2278
Michael Mathews.............. 10,000 56,250(17)/34,138 0.1178 0.0786
All directors and officers as
a group.................... 196,055 495,168/363,753 1.2204 0.9906
</Table>
- ---------------
Notes:
(1) The information as to securities beneficially owned or over which control
or direction is exercised is not within the knowledge of Hemosol and has
been furnished by its directors and senior officers.
(2) Assuming the exercise of all Hemosol Options and/or Hemosol Warrants held
by such director or officer.
(3) Assuming the exercise of all Hemosol Options and/or Hemosol Warrants held
by a director or officer that are exercisable within 60 days after March 1,
2004.
(4) Mr. Kostuch currently holds 12,500 Hemosol Warrants to purchase Hemosol
Shares with an exercise price of $0.90 per Hemosol Warrant, as well as
13,000 Hemosol Options. 21,000 Hemosol Options were also conditionally
granted to Mr. Kostuch subject to regulatory and Shareholder approval.
Under the Arrangement, subject to Shareholder ratification and his consent,
Mr. Kostuch will be issued 12,500 warrants to purchase New Hemosol Shares
at an exercise price of $0.86 to replace the Hemosol Warrants currently
held by him and he will be issued a total of 21,000 New Hemosol Options to
replace the aggregate of 34,000 Hemosol Options currently held by and
conditionally granted to him.
(5) This total number represents 6,664 Hemosol Options and 12,500 Hemosol
Warrants.
(6) Mr. Masters currently holds 13,000 Hemosol Options. 21,000 Hemosol Options
were also conditionally granted to Mr. Masters subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Masters will be issued a total of 21,000
New Hemosol Options to replace the aggregate of 34,000 Hemosol Options
currently held by and conditionally granted to him.
(7) Mr. Painter currently holds 13,000 Hemosol Options. 21,000 Hemosol Options
were also conditionally granted to Mr. Painter subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Painter will be issued a total of 21,000
New Hemosol Options to replace the aggregate of 34,000 Hemosol Options
currently held by and conditionally granted to him.
(8) Dr. Valeri currently holds 18,613 Hemosol Options. 21,000 Hemosol Options
were also conditionally granted to Dr. Valeri subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Dr. Valeri will be issued a total of 26,513
New Hemosol Options to replace the aggregate of 39,613 Hemosol Options
currently held by and conditionally granted to him.
53
(9) Mr. Lennox currently holds 7,000 Hemosol Options. 7,000 Hemosol Options
were also conditionally granted to Mr. Lennox subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Lennox will be issued a total of 7,000
New Hemosol Options to replace the aggregate of 14,000 Hemosol Options
currently held by and conditionally granted to him.
(10) Mr. Rygiel currently holds 5,000 Hemosol Options. 7,000 Hemosol Options
were also conditionally granted to Mr. Rygiel subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Rygiel will be issued a total of 7,000
New Hemosol Options to replace the aggregate of 12,000 Hemosol Options
currently held by and conditionally granted to him. All such Hemosol
Options are held in trust for MDS as MDS has a policy which prevents
members of management who sit on the boards of directors of corporations in
which MDS holds an interest from holding any shares in such corporations,
unless such shares were acquired prior to their appointment to such board.
(11) Mr. Lewitt currently holds 5,000 Hemosol Options. 7,000 Hemosol Options
were also conditionally granted to Mr. Lewitt subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Lewitt will be issued a total of 7,000
New Hemosol Options to replace the aggregate of 12,000 Hemosol Options
currently held by and conditionally granted to him. All such Hemosol
Options are held in trust for MDS as MDS has a policy which prevents
members of management who sit on the boards of directors of corporations in
which MDS holds an interest from holding any shares in such corporations,
unless such shares were acquired prior to their appointment to such board.
(12) Mr. McCormack currently holds 10,000 Hemosol Options. 21,000 Hemosol
Options were also conditionally granted to Mr. McCormack subject to
regulatory and Shareholder approval. Under the Arrangement, subject to
Shareholder ratification and his consent, Mr. McCormack will be issued a
total of 21,000 New Hemosol Options to replace the aggregate of 31,000
Hemosol Options currently held by and conditionally granted to him.
(13) Mr. Sims currently holds 18,000 Hemosol Options. 18,000 Hemosol Options
were also conditionally granted to Mr. Sims subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Sims will be issued a total of 18,000 New
Hemosol Options to replace the aggregate of 36,000 Hemosol Options
currently held by and conditionally granted to him.
(14) Mr. Hartwell currently holds 125,000 Hemosol Options. 1,383,113 Hemosol
Options were also conditionally granted to Mr. Hartwell subject to
regulatory and Shareholder approval. Under the Arrangement, subject to
Shareholder ratification and his consent, Mr. Hartwell will be issued a
total of 1,383,113 New Hemosol Options to replace the aggregate of
1,508,113 Hemosol Options currently held by and conditionally granted to
him.
(15) Dr. Bell currently holds 98,807 Hemosol Options. 691,556 Hemosol Options
were also conditionally granted to Dr. Bell subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Dr. Bell will be issued a total of 691,556
New Hemosol Options to replace the aggregate of 790,363 Hemosol Options
currently held by and conditionally granted to him.
(16) Mr. Alkema currently holds 99,998 Hemosol Options. 691,556 Hemosol Options
were also conditionally granted to Mr. Alkema subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Alkema will be issued a total of 691,556
New Hemosol Options to replace the aggregate of 791,554 Hemosol Options
currently held by and conditionally granted to him.
(17) Mr. Mathews currently holds 56,250 Hemosol Options. 100,000 Hemosol Options
were also conditionally granted to Mr. Mathews subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Mathews will be issued a total of 100,000
New Hemosol Options to replace the aggregate of 156,250 Hemosol Options
currently held by and conditionally granted to him.
The following table sets forth (i) the number of Hemosol Shares and (ii)
the total number of Hemosol Options and the number of Hemosol Options that are
exercisable within 60 days after March 1, 2004, beneficially owned, directly or
indirectly, or over which control or direction is exercised, by each director
and executive officer of MDS and, where known after reasonable inquiry, by their
respective associates.
<Table>
<Caption>
TOTAL NUMBER OF PERCENTAGE OF PERCENTAGE OF
HEMOSOL OPTIONS/ HEMOSOL SHARES HEMOSOL SHARES
NUMBER OF (DILUTED TO GIVE (DILUTED TO GIVE
HEMOSOL OPTIONS EFFECT TO ALL EFFECT TO HEMOSOL
EXERCISABLE WITHIN HEMOSOL OPTIONS OPTIONS EXERCISABLE
NUMBER OF HEMOSOL 60 DAYS AFTER HELD BY DIRECTOR WITHIN 60 DAYS AFTER
NAME SHARES(1) MARCH 1, 2004 OR OFFICER)(2) MARCH 1, 2004)(3)
- ---- ----------------- ------------------- ------------------- --------------------
R. Ian Lennox................... 0 7,000(4)/6,000 0.0125 0.0107
Wilfred G. Lewitt............... 0 5,000(5)/4,000 0.0089 0.0071
Mary Mogford.................... 1,700 0 0.0030 0.0030
Edward K. Rygiel................ 0 5,000(6)/4,000 0.0089 0.0071
Nelson M. Sims.................. 2,000 18,000/9,324 0.0356 0.0202
All directors and executive
officers as a group........... 3,700 35,000/23,324 0.0689 0.0481
</Table>
54
- ---------------
Notes:
(1) The information as to securities beneficially owned or over which control
or direction is exercised is not within the knowledge of Hemosol or MDS and
has been furnished by the directors and senior officers of MDS.
(2) Assuming the exercise of all Hemosol Options held by such director or
officer.
(3) Assuming the exercise of all Hemosol Options held by a director or officer
that are exercisable within 60 days after March 1, 2004.
(4) Mr. Lennox currently holds 7,000 Hemosol Options. 7,000 Hemosol Options
were also conditionally granted to Mr. Lennox subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Lennox will be issued a total of 7,000
New Hemosol Options to replace the aggregate of 14,000 Hemosol Options
currently held by and conditionally granted to him.
(5) Mr. Lewitt currently holds 5,000 Hemosol Options. 7,000 Hemosol Options
were also conditionally granted to Mr. Lewitt subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Lewitt will be issued a total of 7,000
New Hemosol Options to replace the aggregate of 12,000 Hemosol Options
currently held by and conditionally granted to him. All such Hemosol
Options are held in trust for MDS as MDS has a policy which prevents
members of management who sit on the boards of directors of corporations in
which MDS holds an interest from holding any shares in such corporations,
unless such shares were acquired prior to their appointment to such board.
(6) Mr. Rygiel currently holds 5,000 Hemosol Options. 7,000 Hemosol Options
were also conditionally granted to Mr. Rygiel subject to regulatory and
Shareholder approval. Under the Arrangement, subject to Shareholder
ratification and his consent, Mr. Rygiel will be issued a total of 7,000
New Hemosol Options to replace the aggregate of 12,000 Hemosol Options
currently held by and conditionally granted to him. All such Hemosol
Options are held in trust for MDS as MDS has a policy which prevents
members of management who sit on the boards of directors of corporations in
which MDS holds an interest from holding any shares in such corporations,
unless such shares were acquired prior to their appointment to such board.
None of the directors or the officer of MDS Subco beneficially owns,
directly or indirectly, or exercises control or direction over, any securities
of Hemosol.
MDS beneficially owns, directly or indirectly, 6,549,897 Hemosol Shares,
representing 11.7% of the Hemosol Shares issued and outstanding. See "General
Proxy Matters -- Voting Securities and Principal Holders Thereof". MDS also owns
the Tranche A Warrants and the right to be issued the Tranche B Warrants in
certain circumstances. See "Hemosol Prior to the Arrangement -- Credit
Facility".
SECURITIES TRANSACTIONS
On February 20, 2004, Mitchell J. Kostuch, a member of the Hemosol Board,
purchased on the secondary market 25,000 Hemosol Shares and 12,500 Hemosol
Warrants for an aggregate purchase price of $18,750.
DIVIDEND POLICY
Hemosol has not declared or paid any dividends since its inception in 1985.
There is no restriction on Hemosol's present ability to pay dividends. For
restrictions on Labco's ability to pay dividends following the Arrangement, see
"Labco After the Arrangement -- Description of Share Capital".
PREVIOUS DISTRIBUTIONS
During the five years prior to March 10, 2004, Hemosol distributed Hemosol
Shares (other than Hemosol Shares purchased pursuant to the exercise of employee
stock options, stock options granted to external consultants or employee stock
purchase plans) as set forth below.
On April 27, 1999, Hemosol issued 2,400,000 special warrants at a purchase
price per special warrant of $4.60 for gross proceeds of $11,040,000. Each
special warrant entitled the holder to acquire, at no additional cost, one
Hemosol Share. On May 25, 1999, Hemosol issued 2,400,000 Hemosol Shares in
exchange for these 2,400,000 special warrants.
On January 17, 2000, Hemosol issued 5,520,000 Hemosol Shares at a purchase
price per Hemosol Share of $8.35 for gross proceeds of $46,092,000. In addition,
Hemosol granted 276,000 after-market support options to the underwriters. Each
after-market support option entitled the holder to purchase one Hemosol Share at
a price of $9.00 during the period ended October 31, 2001. During 2001, all
276,000 support options were exercised.
On March 27, 2000, Hemosol issued 1,219,000 Hemosol Shares at a purchase
price per Hemosol Share of $19.00 for gross proceeds of $23,161,000. In
addition, Hemosol granted 60,950 after-market support options to the
underwriters. Each after-market support option entitled the holder to purchase
one Hemosol Share at a price of $19.00 during the period ended October 5, 2001.
During 2001, all 60,950 support options expired.
55
On November 8, 2000, Hemosol issued 333,333 Hemosol Shares for gross
proceeds of $5 million in a private placement transaction. In addition, a
16-month option was granted to purchase an additional 222,222 Hemosol Shares at
$22.50 per Hemosol Share. During 2002, all 222,222 options expired.
On November 10, 2000, Hemosol issued 85,000 Hemosol Share purchase warrants
at an exercise price of $18.00 per Hemosol Share in connection with the
finalization of its senior credit facility with National Bank of Canada and The
Bank of Nova Scotia. These warrants were recorded at an estimated fair value of
$624,000 using the Black-Scholes option pricing model and are exercisable at any
time until their expiry date in November 2005. All 85,000 purchase warrants were
cancelled in 2002.
On December 14, 2000, Hemosol issued 400,000 Hemosol Share purchase
warrants at an exercise price of $18.00 per Hemosol Share in connection with the
finalization of its subordinate credit facility with the Manufacturers Life
Insurance Company. These warrants have been recorded at an estimated fair value
of $2,276,000 using the Black-Scholes option pricing model and are exercisable
at any time until their expiry date in December 2005. To date, none of these
warrants have been exercised.
On March 1, 2001, Hemosol issued 7,000,000 Hemosol Shares at a purchase
price per Hemosol Share of $13.50 for gross proceeds of $94.5 million pursuant
to an underwritten public offering registered under the U.S. Securities Act. In
addition, Hemosol granted 1,050,000 over-allotment options entitling the
underwriters to purchase Hemosol Shares at a price of $13.50 per Hemosol Share
during the period ended March 31, 2001. During 2001, all 1,050,000
over-allotment options were exercised for gross proceeds of $14,175,000.
In April 2002, Hemosol cancelled 85,000 Hemosol Share purchase warrants at
an exercise price of $18.00 per share previously issued on November 10, 2000 to
National Bank of Canada and The Bank of Nova Scotia, and on April 22, 2002
issued 45,000 Hemosol Share purchase warrants to The Bank of Nova Scotia and
60,000 to National Bank of Canada, in each case at an exercise price of $6.31
per Hemosol Share, which are exercisable at any time until their expiry date on
April 22, 2007. The difference in fair value between the new and cancelled
options determined using the Black-Scholes option pricing model of approximately
$186,000 was included in net loss for 2002. To date, none of these warrants has
been exercised.
On April 18, 2002, Hemosol issued 4,900,000 Hemosol Shares and 2,450,000
Hemosol Share purchase warrants, offered in units, for gross proceeds of
$22,050,000. The purchase price per unit, consisting of one Hemosol Share and
one-half Hemosol Share purchase warrant, was $4.50. Each whole warrant entitled
the holder to purchase one Hemosol Share at a price of $5.50 per Hemosol Share
at any time until their expiry date on April 18, 2003. None of these warrants
were exercised before their expiry.
On November 22, 2002, Hemosol issued the Tranche A Warrants to MDS. These
warrants have been recorded at an estimated fair value of $7,080,000 using the
Black-Scholes option pricing model. See "-- Credit Facility" above.
On November 28, 2003, Hemosol completed the Special Warrant Offering as
discussed in "-- Special Warrant Offering" above.
DOCUMENTS INCORPORATED BY REFERENCE
Hemosol is a reporting issuer in all Canadian jurisdictions. The following
documents of Hemosol filed with the Canadian Securities Administrators are
specifically incorporated by reference into and form an integral part of this
Circular:
(a) Annual Information Form dated May 27, 2003 for the year ended December
31, 2002;
(b) the Audited Financial Statements and the report of Hemosol's auditors
thereon;
(c) management's discussion and analysis of financial condition and
results of operations contained in Hemosol's 2002 Annual Report;
(d) material change report dated March 20, 2003 in connection with the
announcement of the recommendation by Hemosol's Data Safety Monitoring
Board to review safety data prior to continuing enrolment in Hemosol's
cardiac trial (HLK 213/304);
(e) material change report dated April 14, 2003 in connection with: (i)
the announcement that Hemosol would be limiting the enrolment in its
cardiac trial (HLK 213/304) for its lead product HEMOLINK in response
to an imbalance in the incidence of certain adverse events between the
HEMOLINK and the
56
control groups; and (ii) the announcement that Hemosol had given
working notice to substantially all of its employees;
(f) material change report dated December 5, 2003 in connection with the
closing of the offering of Special Warrants;
(g) material change report dated December 10, 2003 in connection with the
announcement of the entering into of a memorandum of understanding
dated December 3, 2003 with ProMetic; and
(h) material change report dated February 20, 2004 in connection with the
announcement of the entering into of the Arrangement Agreement.
All documents of the type referred to above and all material change reports
(excluding confidential material change reports) and interim consolidated
financial statements (including management's discussion and analysis of
financial condition and results of operations in the quarterly reports for such
interim periods), filed by Hemosol with securities commissions or similar
authorities in the Provinces of Ontario and Alberta subsequent to the date of
this Circular and prior to the Effective Date will be deemed to be incorporated
by reference into, and form an integral part of, this Circular.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein will be deemed to be modified or superseded for
the purposes of this Circular to the extent that a statement contained herein,
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. The
modifying or superseding statement need not state that it has modified or
superseded a prior statement or include any other information set forth in the
document that it modifies or supersedes. The making of a modifying or
superseding statement shall not be deemed an admission for any purposes that the
modified or superseded statement, when made, constituted a misrepresentation, an
untrue statement of a material fact or an omission to state a material fact that
is required to be stated or that is necessary to make a statement not misleading
in light of the circumstances in which it was made. Any statement so modified or
superseded will not be deemed, except as so modified or superseded, to
constitute a part of this Circular.
Information has been incorporated by reference in this Circular from
documents filed with the Canadian Securities Administrators. Copies of the
documents incorporated herein by reference may be obtained on request without
charge from the Secretary of Hemosol at 2585 Meadowpine Blvd., Mississauga,
Ontario L5N 8H9 (telephone (905) 286-6200). For the purposes of the Province of
Quebec, this Circular contains information to be completed by consulting the
permanent information record. A copy of the permanent information record may be
obtained from the Secretary of Hemosol at the above-mentioned address and
telephone number.
Hemosol is subject to the informational requirements of the U.S. Exchange
Act and in accordance therewith files reports and other information with the
SEC. The reports and other information filed by Hemosol with the SEC can be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street N.W., Washington, D.C. 20549. Copies of these documents are
also available on the SEC's website, http://www.sec.gov. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
room.
57
NEW HEMOSOL AFTER THE ARRANGEMENT
NEW HEMOSOL
New Hemosol was incorporated under the OBCA on February 24, 2004. New
Hemosol has not carried on any active business since incorporation and is
currently a wholly-owned subsidiary of Hemosol.
Following the Arrangement, New Hemosol will, in effect, be the successor to
Hemosol's current Blood Products Business as it will hold a 93% interest in and
be the general partner of the Blood Products Partnership. As such, New Hemosol
will be entitled to 93% of the partnership distributions from the Blood Products
Partnership.
The Blood Products Partnership will own and operate Hemosol's current Blood
Products Business. See "The Blood Products Partnership After the Arrangement".
On the Effective Date, New Hemosol will be owned by MDS and the Public
Shareholders on the same pro rata basis as Hemosol was owned immediately prior
to the Effective Time.
SHARE CAPITAL
Following the Arrangement, New Hemosol will be authorized to issue an
unlimited number of New Hemosol Shares and an unlimited number of New Hemosol
Special Shares issuable in series. The following is a summary of the rights,
privileges, restrictions and conditions attached to the New Hemosol Special
Shares and is subject to the provisions of the New Hemosol Share Conditions as
set out in Exhibit 9 to the Arrangement Agreement attached as Annex D to this
Circular.
PROVISIONS ATTACHING TO THE NEW HEMOSOL SHARES
The holders of New Hemosol Shares will be entitled to receive notice of, to
attend and vote at any meeting of the shareholders of New Hemosol, with each New
Hemosol Share carrying one vote. The holders of New Hemosol Shares will be
entitled to receive dividends if, as and when declared by the board of directors
of New Hemosol, subject to the rights of holders of any other class of shares of
New Hemosol entitled to receive dividends in priority to or rateably with the
holders of New Hemosol Shares. The holders of New Hemosol Shares will be
entitled to share rateably in any distribution of the assets of New Hemosol in
the event of any liquidation, dissolution or winding-up of New Hemosol, whether
voluntary or involuntary, or any other distribution of the assets of New Hemosol
for the purpose of winding up its affairs, subject to the rights of holders of
any other class of shares of New Hemosol entitled to receive the assets of New
Hemosol upon such distribution in priority to or rateably with the holders of
New Hemosol Shares.
PROVISIONS ATTACHING TO THE NEW HEMOSOL SPECIAL SHARES
The New Hemosol Board may issue New Hemosol Special Shares at any time and
from time to time in one or more series. Before the first shares of a particular
series are issued, the New Hemosol Board may fix the number of shares in such
series and will determine, subject to the limitations set out in the articles of
New Hemosol, the designation, rights, privileges, restrictions and conditions to
attach to the shares of such series, including, without limitation, (i) the
rate(s), amount or method(s) of calculation of dividends and whether they are
cumulative, partly cumulative or non-cumulative, and whether such rate(s),
amount or method(s) of calculation will be subject to change or adjustment in
the future, (ii) the date, manner and currency of payments of dividends and the
date from which they accrue or become payable, (iii) if redeemable or
purchasable, the redemption or purchase price and terms and conditions of
redemption or purchase, with or without provision for purchase or similar funds,
(iv) the voting rights, if any, (v) any conversion, exchange or reclassification
rights and (vi) any other terms not inconsistent with such provisions. Before
the issue of the first shares of a series, the New Hemosol Board will send to
the Director articles of amendment in the prescribed form containing a
description of such series including the designation, rights, privileges,
restrictions and conditions determined by the New Hemosol Board.
The New Hemosol Special Shares of each series will, with respect to the
payment of dividends and the distribution of assets in the event of the
dissolution, liquidation or winding-up of New Hemosol or other distribution of
its assets among its shareholders for the purposes of winding up its affairs,
rank on a parity with the New Hemosol Special Shares of every other series. If
any amount of cumulative dividends (whether or not declared) or declared
58
non-cumulative dividends or any amount payable on any such distribution of
assets constituting a return of capital in respect of the New Hemosol Special
Shares of any series is not paid in full, the New Hemosol Special Shares of such
series will participate rateably with the New Hemosol Special Shares of every
other series in respect of all accumulated cumulative dividends (whether or not
declared) and all declared non-cumulative dividends or all amounts payable on
any such distribution constituting a return of capital.
PRINCIPAL SHAREHOLDERS
Upon completion of the Arrangement, the Shareholders will hold all of the
issued and outstanding New Hemosol Shares, on the same pro rata basis as the
Shareholders hold Hemosol Shares immediately prior to the Effective Time.
Assuming that MDS's shareholdings of Hemosol immediately prior to the Effective
Time are the same as its current shareholdings, MDS will hold, directly or
indirectly, 11.7% and the Public Shareholders will collectively hold 88.3% of
the issued and outstanding New Hemosol Shares.
DIRECTORS AND OFFICERS
New Hemosol will have a minimum of one and a maximum of ten directors. The
directors are to supervise the activities and manage the affairs of New Hemosol.
At the Meeting, Shareholders will be asked to elect directors of Hemosol.
If the Arrangement Resolution is approved, upon completion of the Arrangement,
the newly elected directors of Hemosol will become the directors of New Hemosol.
See "Annual Meeting and Other Special Business -- Election of Directors".
The term of office of all directors will expire at the next annual meeting
of holders of New Hemosol Shares.
The directors and officers of New Hemosol will be covered by insurance in
respect of liability that may be incurred by them acting in such capacity,
unless the liability arises because such director or officer fails to act
honestly and in good faith with a view to the best interests of New Hemosol.
EMPLOYEES
Upon completion of the Arrangement, New Hemosol will employ the three
current executive officers of Hemosol, being Lee Hartwell, President, Chief
Executive Officer and Chief Financial Officer, Dirk Alkema, Vice President,
Operations and David Bell, Vice President, Drug Discovery, as well as Pardip
Gill, Hemosol's controller. These individuals will be employed on the same terms
and conditions as their employment with Hemosol immediately prior to the
Effective Date.
NEW HEMOSOL CONVERTIBLE SECURITIES
Under the Plan of Arrangement, New Hemosol will assume the obligations of
Hemosol under the Hemosol Convertible Securities as if such Hemosol Convertible
Securities provided a right to acquire New Hemosol Shares and/or New Hemosol
Convertible Securities (other than a reduction of the exercise price of each
Hemosol Convertible Security by $0.04). As a result, after the Effective Date,
the New Hemosol Convertible Securities will be identical to the Hemosol
Convertible Securities (other than such exercise price reduction), with the
exception of the reduction of the Tranche A Warrants and Tranche B Warrants by
the respective number of Surrendered Warrants, as described in "The Arrangement
- -- Treatment of Hemosol Convertible Securities in Connection with the
Arrangement".
NEW HEMOSOL STOCK OPTION PLAN
At the Meeting, Shareholders will be asked to consider, and if deemed
advisable, approve the adoption by New Hemosol of the New Hemosol Stock Option
Plan. See "Annual Meeting and Other Special Business -- Approval of New Hemosol
Stock Option Plan".
The purpose of the New Hemosol Stock Option Plan is to assist directors,
officers, members of any scientific advisory board and key employees of and
consultants to New Hemosol, its subsidiaries and the Blood Products Partnership
(each a "Participant"), to participate in the growth and development of New
Hemosol and its subsidiaries by providing such persons with the opportunity,
through share options, to acquire an increased
59
proprietary interest in New Hemosol. The New Hemosol Stock Option Plan will be
administered by a compensation committee (the "Compensation Committee")
appointed by the New Hemosol Board.
The maximum number of New Hemosol Shares that may be issued under the New
Hemosol Option Plan is 5,500,000 or approximately 9.79% of the aggregate number
of Hemosol Shares issued and outstanding on a non-diluted basis.
The New Hemosol Stock Option Plan will be substantially similar to the
Hemosol Stock Option Plan and provides that New Hemosol may, pursuant to the
recommendations of the Compensation Committee and upon the approval of the New
Hemosol Board, grant to Participants New Hemosol Options to purchase New Hemosol
Shares. The purchase price per each optioned New Hemosol Share will be
determined by the New Hemosol Board, which purchase price will not be less than
the fair market value of a New Hemosol Share on the date the New Hemosol Option
is granted, except in respect of any New Hemosol Options issued under the Plan
of Arrangement (see "The Arrangement -- Treatment of Hemosol Options in
Connection with the Arrangement" and "--Transaction Steps Under the Plan of
Arrangement"). The number of New Hemosol Shares subject to each New Hemosol
Option, the expiration date, the extent to which New Hemosol Options are
exercisable and other terms and conditions relating to such options will be
determined by the Compensation Committee. If no specific determination is made
by the Compensation Committee, each New Hemosol Option will be exercisable
within five years from the date of the grant, and an optionee may take up and
pay for not more than 33 1/3% of the New Hemosol Shares covered by such option
during each twelve-month period following the first anniversary of the date of
the grant. If the number of New Hemosol Shares taken up under a New Hemosol
Option during any twelve-month period is less than 33 1/3% of the New Hemosol
Shares covered by such option, the optionee will have the right at any time
during the remainder of the term of the option to purchase such number of New
Hemosol Shares subject to the option which were purchasable but not purchased by
the optionholder during the twelve-month period.
The New Hemosol Stock Option Plan is subject to the terms and conditions
contained therein and should be read in its entirety. See Annex F, "New Hemosol
Stock Option Plan", to this Circular.
SELECTED NEW HEMOSOL HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
Financial information presenting New Hemosol's audited balance sheet as at
February 24, 2004, and unaudited pro forma financial data as at and for the year
ended December 31, 2003, each prepared in accordance with Canadian GAAP, is set
out in Annex H and Annex I, respectively. New Hemosol was incorporated on
February 24, 2004 and, accordingly, did not conduct business operations prior to
that date. The unaudited New Hemosol pro forma financial information gives
effect to the transactions which are directly attributable to the Arrangement,
up to and including the Effective Date, and is presented on the basis that New
Hemosol will consolidate the balance sheet and operating results of Hemosol as
the successor of Hemosol using Hemosol's historical accounting basis.
The unaudited pro forma consolidated statement of loss and deficit for the
year ended December 31, 2003 gives effect to the Arrangement and certain other
transactions, which either have occurred or will probably occur subsequent to
December 31, 2003, as if they had occurred on January 1, 2003. The unaudited pro
forma balance sheet as at December 31, 2003 gives effect to the Arrangement and
certain other transactions, which either have occurred or will probably occur
subsequent to December 31, 2003 as if they had occurred on such date. In the
opinion of management, all significant adjustments necessary to reflect the
effects of the Arrangement have been made.
The unaudited pro forma financial information is presented for comparative
purposes only and is not necessarily indicative of what New Hemosol's actual
future financial position and operating results would be. This unaudited pro
forma financial information should be read in conjunction with, and is qualified
in its entirety by, the Audited Financial Statements.
REGISTERED OFFICE
The registered and principal office of New Hemosol will be the same as the
current registered and principal office of Hemosol located at 2585 Meadowpine
Boulevard, Mississauga, Ontario, Canada L5N 8H9. The telephone number for this
office will be (905) 286-6200.
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LABCO AFTER THE ARRANGEMENT
LABCO AFTER THE ARRANGEMENT
Following the Arrangement, Labco (formerly Hemosol) will hold:
(a) a 7% limited partnership interest in the Blood Products Partnership;
and
(b) a 99.99% limited partnership interest in the Labs Partnership.
The Blood Products Partnership will own and operate the Blood Products
Business. See "The Blood Products Partnership After the Arrangement". The Labs
Partnership will own and operate MDS's Labs Business (excluding the employees
and medical directors of the Labs Business who were either transferred by MDS to
MDS Subco on January 1, 2004 or who remain with MDS as part of its national
business). See "The Labs Partnership After the Arrangement".
As the 99.99% limited partner of the Labs Partnership, Labco will be
entitled to 99.99% of the partnership distributions from the Labs Partnership
(net of certain distributions to the general partner for expense
reimbursements). Labco will also be entitled to partnership distributions from
the Blood Products Partnership pro rata to its interest in the Blood Products
Partnership which will be approximately 7% upon completion of the Arrangement.
On the Effective Date, Public Shareholders will own not less than 52.5% of
the voting shares and 0.44% of the equity securities of Labco (through ownership
of Labco Class A Shares) and MDS will own not more than 47.5% of the voting
shares and 99.56% of the equity securities of Labco (through ownership of a
combination of Labco Class A Shares and Labco Class B Non-Voting Shares). As
part of the Plan of Arrangement, New Hemosol will acquire the Labco Class C
Shares, which will be immediately redeemed by Labco for aggregate redemption
proceeds of $16 million and certain other consideration.
OBJECTS
As part of the Arrangement, the business of Labco will be restricted by its
articles. The following is a summary of the corporate objects of Labco and is
subject to the detailed provisions of Appendix A to the Plan of Arrangement.
After the Arrangement, Labco will be a limited purpose corporation whose
objective will be to (i) maximize Distributable Cash Flow (as defined below)
through ownership of the Partnership Interests, and any property and/or assets
that are acquired or received by Labco as a result of a sale, transfer or other
disposition of the Partnership Interests or the liquidation, dissolution or
winding-up of the Partnerships, as set out in (a) below, and (ii) distribute all
Distributable Cash Flow to holders of the Labco Class A Shares and Labco Class B
Non-Voting Shares by way of dividends or other distributions, subject to its
articles and applicable law and provided that no dividends will be declared on
the Labco Class A Shares and the Labco Class B Non-Voting Shares on or prior to
October 31, 2004 (see "-- Description of Share Capital -- Provisions Attaching
to the Labco Class A Shares" and "-- Provisions Attaching to the Labco Class B
Non-Voting Shares"). Labco will otherwise be prohibited from, directly or
indirectly, carrying on any business, purchasing or otherwise acquiring or
selling, transferring or otherwise disposing of any assets or exercising any
powers other than:
(a) holding the Partnership Interests and not selling, transferring or
otherwise disposing of all or any part of either Partnership Interest,
except:
(i) in accordance with a sale, transfer or other disposition carried
out pursuant to the terms of the partnership agreement governing
the applicable Partnership; or
(ii) on the liquidation, dissolution or winding-up of the applicable
Partnership, as the case may be, in which case Labco will hold the
property and/or assets that are acquired or received by Labco as a
result of such sale, transfer or other disposition or such
liquidation, dissolution or winding-up and will deal with such
property and/or assets as the Labco Board considers appropriate in
the ordinary course of Labco's business;
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(b) performing its obligations and exercising its rights under any
agreements entered into by Labco in connection with the Arrangement
and any other agreements entered into by Labco in the ordinary course
of Labco's business;
(c) issuing shares (or rights, warrants, convertible securities or options
to acquire shares) for valuable consideration provided that (i) any
such issuance is consistent with Labco's articles and (ii) no Labco
Class A Shares (or rights, warrants, convertible securities or options
to acquire such shares) may be issued except in connection with a
stock dividend, a stock split or similar event that affects all
holdings of Labco Class A Shares in the same manner, on a per share
basis;
(d) borrowing money upon the credit of Labco and granting security
therefor, for any purpose in the ordinary course of Labco's business;
(e) temporarily holding cash in accounts of Canadian chartered banks,
short-term government debt or short-term investment grade corporate
debt for the purposes of paying the expenses of Labco, making
dividends or other distributions to its shareholders and carrying out
any other activities in the ordinary course of Labco's business;
(f) satisfying the obligations, liabilities or indebtedness of Labco; and
(g) engaging in any acts or exercising any powers necessary or desirable
to carry out any other activities in the ordinary course of Labco's
business, including as provided in Labco's articles and the Amended
and Restated Labco By-Laws.
In addition to any other approvals required by the OBCA, the restrictions
and limitations on Labco's objects set out in Labco's articles may only be
amended, supplemented, repealed or otherwise modified by resolution passed by
the affirmative vote of at least two-thirds of the votes cast at a meeting of
the holders of each class of the issued and outstanding Labco Class A Shares and
Labco Class B Non-Voting Shares, each voting separately as a class, duly called
for that purpose.
DESCRIPTION OF SHARE CAPITAL
The following is a summary of the material rights, privileges, restrictions
and conditions that attach to the Labco Class A Shares, the Labco Class B
Non-Voting Shares and the Labco Class C Shares. This summary is subject to the
detailed provisions of the Labco Share Conditions as set out in Appendix A to
the Plan of Arrangement.
AUTHORIZED CAPITAL
The authorized share capital of Labco will consist of:
(a) an unlimited number of Labco Class A Shares which, subject to the
provisions of Labco's articles, will be entitled to one vote per
share, provided that following the Effective Date, additional Labco
Class A Shares may only be issued in limited circumstances;
(b) an unlimited number of Labco Class B Non-Voting Shares which will not
be entitled to vote except as provided by law or as provided in
Labco's articles; and
(c) that number of Labco Class C Shares equal to the number of outstanding
Hemosol Shares at the Effective Time, which will be redeemable
preferred shares with a cumulative dividend rate of 0.25% per month,
provided that following the redemption of the Labco Class C Shares,
the number of authorized Labco Class C Shares will be reduced by the
number so redeemed.
In addition to any other approvals required by the OBCA, Labco will not
create any shares ranking in priority to or on a parity with the Labco Class A
Shares or the Labco Class B Non-Voting Shares without the prior approval of the
holders of each class of the shares of Labco by resolution passed by the
affirmative vote of at least two-thirds of the votes cast at a meeting of the
holders of each class, voting separately as a class, duly called for that
purpose.
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PROVISIONS ATTACHING TO THE LABCO CLASS A SHARES
Dividends
The holders of Labco Class A Shares will be entitled to receive dividends
as and when declared by the Labco Board, out of Distributable Cash Flow, in such
amount and in such form as the Labco Board may determine, provided that no
dividends will be declared on or prior to October 31, 2004. The payment of
dividends to holders of Labco Class A Shares will be subject to the preferential
rights of the holders of Labco Class C Shares and any other shares ranking
senior to the Labco Class A Shares.
All dividends on the Labco Class A Shares and the Labco Class B Non-Voting
Shares declared by the Labco Board will be declared and paid in equal amounts
per share on all Labco Class A Shares and Labco Class B Non-Voting Shares
outstanding at the time without preference or distinction.
Notwithstanding the above, dividends may be declared and paid on the Labco
Class B Non-Voting Shares in advance of dividends declared and paid on the Labco
Class A Shares so long as the aggregate amount per share of all dividends
declared and paid on the Labco Class A Shares in any fiscal year of Labco equals
(without regard to the timing of payment of such dividends) the aggregate amount
per share of all dividends declared and paid on the Labco Class B Non-Voting
Shares in such fiscal year of Labco.
Dissolution
In the event of the dissolution, liquidation or winding-up of Labco,
whether voluntary or involuntary, or any other distribution of assets of Labco
among its shareholders for the purpose of winding up its affairs, the holders of
the Labco Class A Shares and the Labco Class B Non-Voting Shares will be
entitled to receive the remaining property and assets of Labco in equal amounts
per share without preference or distinction. The dissolution rights of the
holders of the Labco Class A Shares will be subject to the prior rights of the
holders of the Labco Class C Shares and any other shares ranking senior to the
Labco Class A Shares and the Labco Class B Non-Voting Shares.
Voting Rights
The holders of Labco Class A Shares will be entitled to receive notice of
and to attend all meetings of the shareholders of Labco and, subject to the
provisions of Labco's articles summarized in "-- Provisions Attaching to the
Labco Class B Non-Voting Shares -- Specified Offer" below, will have one vote
for each Labco Class A Share held at all meetings of the shareholders of Labco,
except meetings at which only holders of another specified class or series of
shares of Labco are entitled to vote separately as a class or series.
PROVISIONS ATTACHING TO THE LABCO CLASS B NON-VOTING SHARES
Dividends
The holders of Labco Class B Non-Voting Shares will be entitled to receive
dividends as and when declared by the Labco Board, out of Distributable Cash
Flow, in such amount and in such form as the Labco Board may determine, provided
that no dividends will be declared on or prior to October 31, 2004. The payment
of dividends to holders of Labco Class B Non-Voting Shares will be subject to
the preferential rights of the holders of Labco Class C Shares and any other
shares ranking senior to the Labco Class B Non-Voting Shares.
All dividends on the Labco Class A Shares and the Labco Class B Non-Voting
Shares declared by the Labco Board will be declared and paid in equal amounts
per share on all Labco Class A Shares and Labco Class B Non-Voting Shares at the
time outstanding without preference or distinction.
Notwithstanding the above, dividends may be declared and paid on the Labco
Class B Non-Voting Shares in advance of dividends declared and paid on the Labco
Class A Shares so long as the aggregate amount per share of all dividends
declared and paid on the Labco Class A Shares in any fiscal year of Labco equals
(without regard to the timing of payment of such dividends) the aggregate amount
per share of all dividends declared and paid on the Labco Class B Non-Voting
Shares in such fiscal year of Labco.
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Dissolution
In the event of the dissolution, liquidation or winding-up of Labco,
whether voluntary or involuntary, or any other distribution of assets of Labco
among its shareholders for the purpose of winding up its affairs, the holders of
the Labco Class B Non-Voting Shares and the Labco Class A Shares will be
entitled to receive the remaining property and assets of Labco in equal amounts
per share without preference or distinction. The dissolution rights of the
holders of the Labco Class B Non-Voting Shares will be subject to the prior
rights of the holders of the Labco Class C Shares and any other shares ranking
senior to the Labco Class B Non-Voting Shares and the Labco Class A Shares.
Voting Rights
SUBJECT TO APPLICABLE LAW AND ANY OTHER PROVISIONS OF THE ARTICLES OF
LABCO, THE HOLDERS OF THE LABCO CLASS B NON-VOTING SHARES WILL NOT BE ENTITLED
TO RECEIVE NOTICE OF, NOR TO ATTEND NOR VOTE AT ANY MEETINGS OF THE SHAREHOLDERS
OF LABCO. In the event that holders of the Labco Class B Non-Voting Shares are
entitled by law or the articles of Labco to vote at a meeting of holders of
Labco Class B Non-Voting Shares, the holders of Labco Class B Non-Voting Shares
will have one vote for each Labco Class B Non-Voting Share held.
Specified Offer
The articles of Labco require that a person or group wishing to acquire a
majority of the Labco Class A Shares comply with certain conditions precedent as
set out below.
An Offeror (as defined below) may not acquire any Labco Class A Shares
pursuant to an Offer to Acquire (as defined below) Labco Class A Shares made by
an Offeror where the number of Labco Class A Shares subject to the Offer to
Acquire (the "Specified Offer Shares"), together with the Offeror's Labco Class
A Shares on the date of such Offer to Acquire (the "Offer Date"), would
constitute in the aggregate more than 50% of the total issued and outstanding
Labco Class A Shares on the Offer Date (such Offer to Acquire being referred to
as a "Specified Offer"), without first complying with the provisions specified
below.
Prior to, and as a condition precedent to, the acquisition by an Offeror of
any Labco Class A Shares under a Specified Offer, the Offeror will make
concurrent offers to acquire Labco Class A Shares and Labco Class B Non-Voting
Shares for consideration for each Labco Class A Share and each Labco Class B
Non-Voting Share equal to the Bid Price (as defined below), on the same terms,
except as to the number of shares subject to the offers, which offers will
comply with the provisions of applicable securities legislation relating to a
formal take-over bid (whether or not such offers are required by law to so
comply) (the "Required Bids"):
(a) to all holders of Labco Class A Shares for such number of Labco Class
A Shares as is equal to the number of Specified Offer Shares; and
(b) to all holders of Labco Class B Non-Voting Shares for such number of
Labco Class B Non-Voting Shares that is equal to the lesser of:
(i) A x B, where A equals the number of Labco Class A Shares that are
subject to a Specified Offer, together with the Offeror's Labco
Class A Shares, divided by the total number of issued and
outstanding Labco Class A Shares on the Offer Date and B equals
the total number of issued and outstanding Labco Class B
Non-Voting Shares on the date that the Required Bids are made; and
(ii) the number of issued and outstanding Labco Class B Non-Voting
Shares excluding those that are beneficially owned, or over which
control or direction is exercised, on the date that the Required
Bids are made (including any combination of the foregoing) by the
Offeror;
provided that:
(c) no shares may be taken up or paid for under either of the Required
Bids, unless all shares tendered to each of the Required Bids are
taken up and paid for concurrently; and
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(d) the Offeror will issue a press release following the expiry of the
Required Bids and one business day prior to the take-up of any shares
tendered to the Required Bids, which press release will disclose:
(i) the approximate number of Labco Class A Shares and Labco Class B
Non-Voting Shares tendered to the Required Bids; and
(ii) whether a sufficient number of Labco Class A Shares has been
tendered to the Required Bids such that the Offeror would acquire,
on take-up and payment for such shares, when added to the
Offeror's Labco Class A Shares on the date of take-up, more than
50% of the total issued and outstanding Labco Class A Shares on
the date of take-up.
In the event that an Offeror acquires, directly or indirectly, more than
50% of the total issued and outstanding Labco Class A Shares in violation of the
foregoing requirements, then, effective on the completion of such acquisition
and during such time that the Offeror's Labco Class A Shares constitute more
than 50% of the total issued and outstanding Labco Class A Shares, the total
number of votes attaching to the Offeror's Labco Class A Shares will equal the
difference between: (a) the total number of issued and outstanding Labco Class A
Shares, and (b) the number of the Offeror's Labco Class A Shares, and, for
greater certainty, the Labco Class A Shares other than the Offeror's Labco Class
A Shares will continue to have one vote per share.
For purposes of this section of the Circular entitled "Labco After the
Arrangement":
(a) "BID PRICE" means the consideration for each Labco Class A Common
Share and each Labco Class B Non-Voting Share offered to holders of
Labco Class A Shares and holders of Labco Class B Non-Voting Shares,
respectively, under the Required Bids, which consideration will have a
fair market value of not less than the average of the fair market
value of a Class A Common Share on the date that the Required Bids are
made as determined in writing by two nationally recognized investment
banking firms retained by the Offeror for the purpose of providing
such valuation in connection with the Required Bids;
(b) "CASH FLOW", for any Distribution Period of Labco, will equal the
following:
(i) all cash or cash equivalents which are received by Labco in such
Distribution Period, including, without limitation, any
distributions received by Labco from the Partnerships; plus
(ii) all cash or cash equivalents received by Labco in any prior
Distribution Period to the extent not previously distributed
unless such amounts have been set aside by the Labco Board in a
prior Distribution Period for distribution to the holders of the
Labco Class A Shares and/or the Labco Class B Non-Voting Shares in
a subsequent Distribution Period, in which case such amounts set
aside shall not be included in Cash Flow; less
(iii) the Cash Flow Deductions;
(c) "CASH FLOW DEDUCTIONS", for any Distribution Period of Labco, means:
(i) all costs, expenses and debts of Labco which, in the opinion of
the Labco Board, may reasonably be considered to have accrued or
become owing in respect of, or which relate to, such Distribution
Period or a prior Distribution Period if not deducted in the
calculation of Cash Flow for such prior period;
(ii) any tax liability of Labco in respect of, or which relates to,
such Distribution Period; and
(iii) any cash or cash equivalent which is received by Labco in the
Distribution Period which the Labco Board has determined to set
aside for distribution to the holders of Labco Class A Shares
and/or Labco Class B Non-Voting Shares in a subsequent
Distribution Period;
(d) "DISTRIBUTABLE CASH FLOW" for, or in respect of, a Distribution Period
of Labco shall be the Cash Flow of Labco for such Distribution Period,
together with any Cash Flow set aside in a prior Distribution Period
for distribution to the holders of the Labco Class A Shares and/or the
Labco Class B Non-Voting Shares in a subsequent Distribution Period
which the Labco Board has determined to distribute in respect of the
current Distribution Period, less any amount which the Labco Board may
reasonably consider to be necessary to provide for the payment of any
costs and repayment of debts which have been or will be incurred in
the activities and operations of Labco in addition to the Cash Flow
Deductions;
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(e) "DISTRIBUTION PERIOD" means each month in each calendar year from and
including the first day thereof and to and including the last day
thereof, provided that the first Distribution Period shall begin on
(and include) the Effective Date and shall end on (and include) the
last day of the month in which the Effective Date occurs;
(f) "OFFER TO ACQUIRE" includes:
(i) an offer to purchase, a public announcement of an intention to
make an offer to purchase, or a solicitation of an offer to sell,
securities; and
(ii) the receipt of an offer to sell securities, whether or not such
offer to sell has been solicited,
or any combination thereof, and the Person receiving an offer to sell
will be deemed to be making an Offer to Acquire to the Person that made
the offer to sell;
(g) "OFFEROR" means a Person that makes an Offer to Acquire Labco Class A
Shares, and includes any Persons related to such Person for purposes
of the Tax Act or any other Person that is acting jointly or in
concert with such Person or who would, together with such Person (and
other Persons), constitute a group for purposes of subsection 111(5)
of the Tax Act;
(h) "OFFEROR'S LABCO CLASS A SHARES", on any date, means the number of
Labco Class A Shares beneficially owned, directly or indirectly, or
over which control or direction is exercised (including any
combination of the foregoing), on the relevant date by the Offeror
either alone or together with Persons who would constitute a group for
purposes of subsection 111(5) of the Tax Act; and
(i) "PERSON" includes an individual, body corporate, partnership, joint
venture, trust, association, unincorporated organization, or any
other entity recognized by law or considered to be a person for
purposes of the Tax Act.
PROVISIONS ATTACHING TO THE LABCO CLASS C SHARES
Dividends
The holders of the Labco Class C Shares, in priority to the Labco Class A
Shares and the Labco Class B Non-Voting Shares and any other shares ranking
junior to the Labco Class C Shares, will be entitled to receive, as and when
declared by the Labco Board out of the funds of Labco properly applicable to the
payment of dividends, fixed preferential cumulative cash dividends at the rate
of 0.25% of the Class C Redemption Amount (as defined below) per month payable
monthly within ten days of the end of each month in each year. The "Class C
Redemption Amount" for each Labco Class C Share will be determined by dividing
$70,672,000 minus the value of the Hemosol Convertible Securities and Hemosol
Options assumed by New Hemosol under the Plan of Arrangement by the number of
issued and outstanding Labco Class C Shares, subject to adjustment in certain
circumstances. The aggregate Class C Redemption Amount (which will be determined
by multiplying the total number of issued and outstanding Labco Class C Shares
by the Class C Redemption Amount) will be deemed to be reduced, on a dollar-
for-dollar basis and from time to time, by an amount equal to any amounts
released from escrow and paid to Labco pursuant to the terms of the Escrow
Agreement. Dividends on the Labco Class C Shares will accrue from but not
including the date of issue of the respective Labco Class C Shares. If on any
dividend payment date the dividend payable is not paid in full on all the Labco
Class C Shares then issued and outstanding, the dividends or the unpaid part
thereof will be paid on a subsequent date determined by the Labco Board on which
Labco will have sufficient funds properly applicable to the payment of
dividends. The holders of the Labco Class C Shares will not be entitled to any
dividends other than or in excess of the fixed preferential cumulative cash
dividends specified above.
Unless all dividends on the Labco Class C Shares then issued and
outstanding, up to and including the dividend payable on the last preceding
dividend payment date, will have been declared and paid or set apart for
payment, the Labco Board will not (i) declare or pay or set apart for payment
any dividends on the Labco Class A Shares and the Labco Class B Non-Voting
Shares or on any shares of any other class of Labco ranking junior to the Labco
Class C Shares or (ii) call for redemption or purchase or otherwise acquire for
value less than all the then outstanding Labco Class C Shares or purchase or
otherwise acquire for value any Labco Class A Shares, Labco Class B Non-Voting
Shares or any shares of any other class of Labco ranking junior to the Labco
Class C Shares.
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Dissolution
In the event of the dissolution, liquidation or winding-up of Labco or
other distribution of assets of Labco among Labco shareholders for the purpose
of winding up its affairs, the holders of the Labco Class C Shares will be
entitled to receive from the assets and property of Labco for each Labco Class C
Share held by them respectively the Class C Redemption Amount together with all
accrued and unpaid preferential cumulative cash dividends thereon (which for
such purpose will be calculated as if such dividends were accruing from day to
day for the period from the expiration of the last period for which cumulative
dividends have been paid up to but excluding the date of distribution) before
any amount will be paid or any assets or property of Labco distributed to the
holders of any Labco Class A Shares, Labco Class B Non-Voting Shares or shares
of any other class ranking junior to the Labco Class C Shares. After payment to
the holders of the Labco Class C Shares of the amounts so payable to them as
above provided, they will not be entitled to share in any further distribution
of the assets or property of Labco.
Redemption by Labco
Subject to the provisions of subsection 32(2) of the OBCA, Labco will be
entitled to redeem at any time all but not less than all of the then outstanding
Labco Class C Shares on payment, in cash or in kind, for each share to be
redeemed, of the Class C Redemption Amount together with all accrued and unpaid
preferential cumulative cash dividends thereon (which for such purpose will be
calculated as if the dividends on the Labco Class C Shares to be so redeemed
were accruing from day to day for the period from the expiration of the last
period for which cumulative dividends have been paid up to but excluding the
date of such redemption).
On the date determined by Labco for redemption, Labco will pay or cause to
be paid to the order of each registered holder of the Labco Class C Shares to be
redeemed the Class C Redemption Amount for each Labco Class C Share registered
in the name of such holder on presentation and surrender of the certificates
representing the Labco Class C Shares redeemed at the registered office of Labco
or any other place designated by Labco. On and after the date of redemption, the
Labco Class C Shares called for redemption will cease to be entitled to
dividends and the holders thereof will not be entitled to exercise any of the
rights of shareholders in respect thereof unless payment of the Class C
Redemption Amount in respect thereof, together with all accrued and unpaid
preferential cumulative cash dividends thereon, will not be made upon
presentation of certificates in accordance with the foregoing, in which case the
rights of the shareholders will remain unaffected.
Labco will have the right at any time on and after the date determined by
Labco for redemption of the Labco Class C Shares to deposit the redemption price
of the shares so called for redemption to a special account in a specified
chartered bank or a specified trust company in Canada, to be paid without
interest to or to the order of the respective holders of such Labco Class C
Shares called for redemption upon presentation and surrender to such bank or
trust company of the certificates representing the same. Upon such deposit being
made, the Labco Class C Shares in respect whereof such deposit will have been
made will be deemed to be redeemed and all rights of the holders thereof after
such deposit will be limited to receiving without interest their proportionate
part of the total Class C Redemption Amount so deposited against presentation
and surrender of the said certificates held by them respectively. Any interest
allowed on any such deposit will belong to Labco.
Voting Rights
Subject to applicable law and any other provisions of the articles of
Labco, the holders of Labco Class C Shares will not be entitled to receive
notice of, nor to attend nor vote at any meetings of the shareholders of Labco.
However, in the event that holders of Labco Class C Shares are entitled to vote
at a meeting of holders of Labco Class C Shares, the holders of Labco Class C
Shares will have one vote for each Labco Class C Share held.
Priority
The Labco Class A Shares and the Labco Class B Non-Voting Shares will rank
on parity and junior to the Labco Class C Shares and will be subordinate in all
respects to the rights, privileges, restrictions and conditions attaching to the
Labco Class C Shares.
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PRINCIPAL SHAREHOLDERS
Upon completion of the Arrangement, Public Shareholders will collectively
hold not less than 52.5% Labco Class A Shares representing 0.44% of the equity
securities of Labco and MDS will hold, directly or indirectly, not more than
47.5% of the Labco Class A Shares and 100% of the Labco Class B Non-Voting
Shares, collectively representing 99.56% of the equity securities and not more
than 47.5% of the voting securities of Labco.
DIRECTORS AND OFFICERS
Pursuant to the Plan of Arrangement, new directors will be elected to the
Labco Board. The following table sets out the name, municipality of residence,
principal occupation and positions that will be held in Labco of each of the
directors and officers of Labco if the Arrangement Resolution is passed by the
Securityholders and the Arrangement becomes effective.
<Table>
<Caption>
NAME AND MUNICIPALITY OF RESIDENCE POSITION PRINCIPAL OCCUPATION
- ---------------------------------- -------- --------------------
Edward E. McCormack
Toronto, ON........................ Director, Chairman Business Advisor and Independent
Director (since June 2003); prior
thereto, President of Almad Investments
and Beaver Power Inc. (January 2000 to
June 2003); CFO of Novopharm Inc.
(October 1987 to December 1999)
Mitchell J. Kostuch
Toronto, ON........................ Director President, Kostuch Publications (a
publisher of business magazines)
Wilfred G. Lewitt
Toronto, ON........................ Director Chairman, MDS (since April 1996)
Edward K. Rygiel
Toronto, ON........................ Director Executive Chairman, MDS Capital Corp. (a
health related venture capital firm)
(since May 2003) and Executive Vice
President, MDS; prior thereto, President
and CEO, MDS Capital Corp. (December
1994 to April 2003)
John Anderson
Toronto, ON........................ President, Chief Executive Consultant (since December 2001); prior
Officer and Chief thereto, CFO, Energenius, Inc. (July
Financial Officer 2000 to December 2001); prior thereto,
Consultant
Peter Brent
Toronto, ON........................ Secretary Senior Vice President, General Counsel
and Corporate Secretary, MDS (since
2002); prior thereto, Vice President,
General Counsel and Corporate Secretary,
MDS (1998 - 2002)
</Table>
CHANGE OF FISCAL YEAR-END
Under the Arrangement, Labco will change its fiscal year-end from December
31 to October 31. This will help to minimize Labco's earnings and profits for
its 2004 fiscal year, which would help to reduce the United States federal
income tax impact of the Arrangement upon Shareholders resident in the United
States. While the change in the fiscal year-end for tax purposes requires the
consent of CCRA, such consent is not expected to be withheld.
68
REGISTERED OFFICE
The registered office of Labco will be 100 International Boulevard,
Toronto, Ontario, M9W 6J6.
AUDITORS, TRANSFER AGENT AND REGISTRAR OF LABCO
The auditors of Labco will be Ernst & Young LLP, Chartered Accountants,
Toronto.
The registrar and transfer agent for the Labco Class A Shares and the Labco
Class B Non-Voting Shares will be Computershare Trust Company of Canada at its
principal office in Toronto.
MATERIAL CONTRACTS OF LABCO
Following the Arrangement, Labco will not be a party to any material
contracts other than the Arrangement Agreement and the following additional
contracts to be entered into by Labco as contemplated by the Arrangement
Agreement and as further disclosed under "The Arrangement":
(a) the Blood Products Contribution Agreement;
(b) the Blood Products Partnership Agreement;
(c) the Partnership Interest Transfer Agreement; and
(d) the Labs Partnership Agreement.
The form of each of the foregoing agreements, other than the Blood Products
Contribution Agreement and the Partnership Interest Transfer Agreement are
Exhibits to the Arrangement Agreement, which is attached hereto as Annex D.
Copies of the form of the Blood Products Contribution Agreement and the
Partnership Interest Transfer Agreement may be inspected during ordinary
business hours at the offices of Hemosol prior to the Effective Date.
INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
Following the Arrangement, MDS Subco will be the general partner of the
Labs Partnership. As general partner, MDS Subco will have the power to manage
and control the business and assets of the Labs Partnership and will be
reimbursed for the reasonable expenses and costs that it incurs in connection
with the performance of its duties as general partner of the Labs Partnership.
MDS Subco will also receive 0.01% of the net income of the Labs Partnership. See
"The Labs Partnership After the Arrangement -- General" and "-- Distributions
and Allocation of Profit and Loss".
Following the Arrangement, MDS will provide support services to the Labs
Partnership and will receive management fees and reimbursement for its
reasonable out-of-pocket costs for providing such services. See "The Labs
Partnership After the Arrangement -- Labs Management Agreement".
SELECTED LABCO PRO FORMA FINANCIAL INFORMATION
Annex J to this Circular sets out the unaudited pro forma statements of
income of Labco for the year ended December 31, 2003 and the unaudited pro forma
balance sheet data at December 31, 2003, each of which gives effect to the
Arrangement and certain other transactions, which either have occurred or will
probably occur subsequent to December 31, 2003. In the opinion of management of
Hemosol and MDS, all significant adjustments necessary to reflect the effects of
the Arrangement have been made. Such unaudited pro forma financial information
is derived from the Audited Financial Statements and the unaudited summary
financial information of the Labs Business and have been prepared solely to
comply with applicable disclosure rules under the U.S. Exchange Act. See
"Regulatory Matters -- Financial Information Exemption."
The summary unaudited pro forma financial information is presented for
comparative purposes only and is not necessarily indicative of what Labco's
actual future results of operations and financial position will be. The summary
unaudited pro forma financial information should be read in conjunction with,
and is qualified in its entirety by, the Audited Financial Statements and the
unaudited summary financial information of the Labs Business. THE SUMMARY
UNAUDITED PRO FORMA FINANCIAL INFORMATION HAS NOT BEEN REVIEWED BY THE AUDITORS
OF MDS OR HEMOSOL AS TO COMPILATION OR OTHERWISE.
69
THE BLOOD PRODUCTS PARTNERSHIP AFTER THE ARRANGEMENT
As at the date hereof, the Blood Products Partnership has not been formed.
The Blood Products Partnership will be formed prior to the Effective Date and,
pursuant to the Arrangement, the Blood Products Partnership will acquire the
Blood Products Business from Hemosol. The disclosure herein has been prepared
assuming the completion of the Arrangement. The following description of the
Blood Products Partnership is a summary only and is qualified in its entirety by
reference to the full text of the Blood Products Partnership Agreement, a copy
of which is attached to this Circular as Exhibit 5 to Annex D, which should be
read carefully in its entirety.
GENERAL
The Blood Products Partnership will be a limited partnership formed under
the terms of the Blood Products Partnership Agreement pursuant to the Limited
Partnerships Act (Ontario). The purpose of the Blood Products Partnership will
be to carry on the Blood Products Business and to engage in such other business
as may be determined by New Hemosol from time to time.
The general partner of the Blood Products Partnership will be New Hemosol.
As general partner, New Hemosol will have the power to manage and control the
business and assets of the Blood Products Partnership. New Hemosol may engage in
other business of any kind, provided it is not in competition with the business
of the Blood Products Partnership.
Labco will be the initial limited partner of the Blood Products
Partnership. Labco will not take part in the control or management of the
business of the Blood Products Partnership.
The economic interest of the partners in the Blood Products Partnership
will be divided into and represented by units. On the Effective Date and
following completion of the Arrangement, New Hemosol will hold approximately 93%
of the outstanding units of the Blood Products Partnership and Labco will hold
approximately 7% of the outstanding units of the Blood Products Partnership.
BUSINESS OF THE BLOOD PRODUCTS PARTNERSHIP
Under the Arrangement, at the Effective Time, Hemosol will transfer to the
Blood Products Partnership all of the Blood Products Assets pursuant to the
Blood Products Contribution Agreement and the Blood Products Partnership will
assume all of the Blood Products Liabilities, including the Bank Loan, pursuant
to the Blood Products Contribution Agreement. As a result, as of the Effective
Date, the Blood Products Partnership will carry on the Blood Products Business,
which is the business currently carried on by Hemosol. See "Hemosol Prior to the
Arrangement".
As the Blood Products Partnership will assume the Bank Loan, all of the
Blood Products Assets will be subject to a security interest in favour of the
Bank as security for the Bank Loan.
DISTRIBUTIONS AND ALLOCATION OF PROFIT AND LOSS
Net income or net loss of the Blood Products Partnership will be allocated
to the partners of the Blood Products Partnership in proportion to the number of
units held by each partner at the end of a fiscal year and distributions will be
made to the partners of the Blood Products Partnership in such amounts and at
such times as determined by New Hemosol in proportion to the allocations of net
income.
REIMBURSEMENT OF GENERAL PARTNER EXPENSES
New Hemosol will be reimbursed by the Blood Products Partnership for all
reasonable costs and expenses incurred by it in the performance of its duties as
general partner of the Blood Products Partnership.
NO REMOVAL OF GENERAL PARTNER
The limited partners of the Blood Products Partnership may not remove New
Hemosol as the general partner of the Blood Products Partnership. New Hemosol
may not resign as the general partner of the Blood Products Partnership except
in connection with the transfer of all of its units of the Blood Products
Partnership.
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TERM
The Blood Products Partnership will continue indefinitely and will be
dissolved on the bankruptcy of, or similar events in respect of, New Hemosol or
on the agreement of all partners to dissolve the Blood Products Partnership.
TRANSFER OF UNITS
If a limited partner of the Blood Products Partnership desires to transfer
any of the units of the Blood Products Partnership held by it, it must first
make an offer to New Hemosol to sell such units to New Hemosol. If New Hemosol
does not accept such offer, the limited partner may sell such offered units to a
third party on terms not more favourable to the third party than the terms at
which such units were offered to New Hemosol.
If at any time a limited partner, including Labco, holds 1% or less of all
of the outstanding units of the Blood Products Partnership, New Hemosol has the
right to purchase all of the units of the Blood Products Partnership held by
such limited partner at a price equal to the fair market value of such units.
If New Hemosol proposes to transfer all of its units of the Blood Products
Partnership to a third party, such transfer may not be completed unless the
third party purchaser extends its offer to purchase units of the limited
partners of the Blood Products Partnership on the same terms and conditions as
those applicable to New Hemosol. If a limited partner does not accept such
offer, New Hemosol may require such limited partner to sell all of its units of
the Blood Products Partnership to the third party purchaser at the same time and
on the same terms and conditions as those applicable to New Hemosol.
EMPLOYEES
Upon completion of the Arrangement, the Blood Products Partnership will
employ all of Hemosol's current employees, except the three current executive
officers of Hemosol, being Lee Hartwell, President, Chief Executive Officer and
Chief Financial Officer, Dirk Alkema, the Vice President, Operations and David
Bell, Vice President, Drug Discovery, and except Pardip Gill, Hemosol's
controller, each of whom will be employed by New Hemosol. All of the employees
of the Blood Products Partnership will be employed on the same terms and
conditions as their employment with Hemosol immediately prior to the Effective
Date.
FINANCIAL INFORMATION
The Audited Financial Statements which are incorporated by reference in
this Circular incorporate the financial results and financial position of the
Blood Products Business which, after completion of the Arrangement, will be
carried out by the Blood Products Partnership. Financial information regarding
Hemosol is included in the Annual Financial Statements and in the pro forma
financial statements for New Hemosol as set out in Annex I. See "New Hemosol
After the Arrangement -- Selected New Hemosol Historical and Pro Forma Financial
Information".
71
THE LABS PARTNERSHIP AFTER THE ARRANGEMENT
As at the date hereof, the Labs Partnership has not been formed. The Labs
Partnership will be formed prior to the Effective Date and, pursuant to the
Arrangement, the Labs Partnership will acquire the Labs Assets from MDS. The
disclosure herein has been prepared assuming the completion of the Arrangement.
The following description of the Labs Partnership is a summary only and is
qualified in its entirety by reference to the full text of the Labs Partnership
Agreement, a copy of which is attached to this Circular as Exhibit 7 to Annex D,
and the Labs Management Agreement, a copy of which is attached to this Circular
as Exhibit 8 to Annex D, each of which should be read carefully in its entirety.
GENERAL
The Labs Partnership will be a limited partnership formed under the terms
of the Labs Partnership Agreement pursuant to the Limited Partnerships Act
(Ontario). The purpose of the Labs Partnership will be to operate a clinical
laboratory services business in Ontario. The Labs Partnership may not carry on
any other business.
The general partner of the Labs Partnership will be MDS Subco. As general
partner, MDS Subco will have the power to manage and control the business and
assets of the Labs Partnership. MDS Subco will provide or arrange for the
provision of personnel who are properly skilled and trained to operate and
manage the business of the Labs Partnership.
Upon completion of the Arrangement, Labco will be the limited partner of
the Labs Partnership. Labco will not take part in the control or management of
the business of the Labs Partnership.
The economic interest of the limited partners in the Labs Partnership will
be divided into and represented by limited partner units. On the Effective Date
following completion of the Arrangement, Labco will hold all of the outstanding
limited partner units of the Labs Partnership.
DISTRIBUTIONS AND ALLOCATION OF PROFIT AND LOSS
The net income of the Labs Partnership for each fiscal year will be
allocated to the partners as follows:
(a) first, 100% will be allocated to MDS Subco until it has received an
aggregate amount equal to all reasonable expenses and costs incurred
by it during such fiscal year in connection with the performance of
its duties as general partner; and
(b) thereafter, all limited partners of record at the end of such fiscal
year will be allocated 99.99% of the remaining net income in
proportion to the number of units held and MDS Subco will be allocated
0.01% of the remaining net income.
Net loss of the Labs Partnership will be allocated to the partners of the
Labs Partnership as described in (b) above.
Distributions will be made to the partners of the Labs Partnership in such
amounts and at such times as determined by MDS Subco in proportion to the
allocations of net income, provided, however, that the Labs Partnership will not
make any distributions on or prior to October 31, 2004.
Except for the loan of $16 million to Labco referred to in "The Arrangement
- -- Transaction Steps Under the Plan of Arrangement", the Labs Partnership will
not lend any funds to Labco on or prior to October 31, 2004. The Labs
Partnership will not lend any funds to MDS Subco or affiliates thereof.
REMOVAL OF GENERAL PARTNER
The limited partners of the Labs Partnership may, at any time if MDS Subco
is in material default of its obligations under the Labs Partnership Agreement
and such default has continued for more than 60 days after notice thereof, by
resolution passed by limited partners holding more than two-thirds of the
limited partner units of the Labs Partnership, remove MDS Subco as general
partner.
TERM
The term of the Labs Partnership will be a minimum period of 15 years
unless the Labs Partnership is dissolved earlier due to the removal or
resignation of MDS Subco as general partner with no appointment of a replacement
general partner, the bankruptcy of or similar events in respect of the Labs
Partnership or the unanimous agreement of the partners of the Labs Partnership.
Following the minimum period of 15 years, the limited partners of the Labs
72
Partnership may dissolve the Labs Partnership by resolution passed by limited
partners holding more than two-thirds of the limited partner units of the Labs
Partnership.
U.S. TAX ELECTION
The Labs Partnership will make an election to be treated as a corporation
for U.S. federal income tax purposes. Accordingly, for U.S. federal income tax
purposes, Labco and MDS Subco will be treated as shareholders of the Labs
Partnership.
LABS MANAGEMENT AGREEMENT
The Labs Partnership will enter into the Labs Management Agreement with MDS
pursuant to which MDS will provide support services to the Labs Partnership,
including information technology services, financial services, purchasing
and/procurement services, human resources services, communications services,
real estate services, regulatory compliance services and government relations
services.
The Labs Partnership will pay to MDS an annual management fee, payable
monthly in advance, equal to MDS's reasonable and documented cost of providing
the support services. In addition, the Labs Partnership will reimburse MDS for
all reasonable out-of-pocket expenses incurred in providing the support
services.
MDS may terminate the Labs Management Agreement upon 120 days' prior notice
or immediately in the event of the removal or resignation of MDS Subco as
general partner of the Labs Partnership.
TRANSFER OF UNITS
Labco will be able to transfer its limited partner units of the Labs
Partnership provided that it complies with certain formal requirements in the
Labs Partnership Agreement.
Pursuant to the Partnership Interest Transfer Agreement, (i) Labco will
grant to MDS a right of first refusal in respect of the Labs Partnership
Interest which right will be exercisable if Labco receives a bona fide written
offer from a third party to purchase the Labs Partnership Interest and (ii)
Labco will grant an option to MDS to purchase the Labs Partnership Interest for
fair market value if any steps are taken to wind up the Labs Partnership or the
Labs Partnership proposes to sell all or substantially all of its assets,
otherwise than in the ordinary course of business.
BUSINESS OF THE LABS PARTNERSHIP
OVERVIEW OF MDS AND THE LABS BUSINESS
MDS is the largest health and life sciences company in Canada with
consolidated revenues for the fiscal year ended October 31, 2003 of $1.8
billion. MDS, through its operating divisions, is involved in a variety of
businesses related to the health and life sciences industry, including:
laboratory testing, imaging agents for nuclear medicine testing, sterilization
systems for medical and consumer products, research services for discovery and
development of drugs, analytical instruments to assist in the development of new
drugs, medical/surgical supplies and proteomics-enabled drug discovery
technology.
Since its inception, laboratory services have formed a major component of
MDS's consolidated business. In Canada, MDS currently operates and supports
laboratory services in the provinces of Ontario, Quebec, Manitoba, Alberta and
British Columbia. In Ontario, the Labs Business principally consists of
conducting a wide range of laboratory tests requested by health care
professionals at various locations throughout the Province. Upon completion of
the Arrangement, the Labs Partnership will continue the Labs Business in
Ontario.
Overview of Laboratory Services in Ontario
Laboratory services are an important element of the Ontario health care
system. Laboratory services include both clinical testing and anatomical
pathology testing. Clinical testing is performed on bodily specimens, including
blood and urine, while anatomical pathology testing is performed on cytological
specimens, including tissue and human cells. Laboratory services are conducted
at the request of health care professionals in furtherance of the diagnosis of
disease and the guidance of patient treatments.
Laboratory services in Ontario are provided both by private sector
community-based service providers and public sector providers such as public
health laboratories and hospital laboratories. Public health laboratories have
generally concentrated on epidemiological matters, such as the tracking of the
spread of communicable diseases,
73
while hospital laboratories generally provide laboratory services to the
hospital in which it is located. Private sector community-based laboratories
("Community Laboratories") provide services to patients receiving care outside
of hospitals.
Laboratories in Ontario are required to hold licences issued by the MOH
which determine the nature of the tests that can be carried out at each facility
and govern the ability of the operator to draw samples for testing purposes.
Licences are for a limited term (usually one year) and are renewable subject to
MOH approval. See "-- Regulatory Matters" below.
Laboratory services in Ontario are generally paid for by the Ontario
provincial government. Community Laboratories in Ontario are compensated for
performing most laboratory services by billing the MOH on a fee for service
basis for those services covered by the MOH, with the fees being established by
a government fee schedule. Fees for laboratory services that are not covered by
the MOH are billed directly to patients. The MOH has both (i) an industry cap,
which limits the total amount that will be paid in the aggregate to the
Community Laboratories for services performed in the Ontario provincial
government's fiscal year and (ii) the corporate cap, which limits the amount
each Community Laboratory service provider can individually be paid for the
services it performs in a fiscal year. The corporate cap is allocated among the
market participants on the basis of market share. If a Community Laboratory
service provider does not perform sufficient services to be able to bill the MOH
for the total amount of that laboratory's cap in any one fiscal year, the MOH
will acquire that unbilled portion of the laboratory's corporate cap and
re-allocate that portion to the other service providers pro rata on the basis of
each provider's market share. MDS has consistently performed sufficient services
to be able to bill the full value of its corporate cap.
Community Laboratories negotiate their contracts with the MOH through the
Ontario Association of Medical Laboratories ("OAML"). Negotiations are conducted
on a regular basis and include the size of the industry cap and fee schedule
adjustments for specific services. The industry cap for all Community
Laboratories is $526 million in 2004 and $553 million in 2005 under an agreement
that runs until March 31, 2005. The industry cap has grown at a compound annual
growth rate of 3.6% from 1997 to 2005 MOH fiscal years.
Market for Laboratory Services in Ontario
The use of laboratory services in Ontario is growing faster than the
Ontario population. For the fiscal year of the MOH ended March 31, 2003, there
were 14.3 million requisitions (patient visits) to Community Laboratories in
Ontario, resulting in a total of 80.2 million tests performed on patients for an
average of 5.6 tests per requisition or patient visit and 6.6 tests per person
in Ontario. It is estimated that approximately 50% of laboratory testing in
Ontario is performed by Community Laboratories. In Ontario, substantially all
out-patient laboratory services are performed by Community Laboratories on a
fee-for-service basis.
Demand for laboratory services in Ontario is expected to continue to
increase in the future as a result of several factors, including the following:
(i) the Ontario population is growing and aging, (ii) physicians and patients
increasingly place more value on laboratory services as a cost-effective means
of disease detection, treatment monitoring and preventive medicine and (iii)
improved equipment and cost-efficiency make testing available to a broader
market. In addition to these factors, Ontario is experiencing increases in the
number of physicians, sophisticated tests and available testing for high-risk
diseases.
THE LABS BUSINESS
Overview of Operations
MDS began operating the Labs Business in Ontario in 1970 and the business
has since grown to become one of the largest providers of community-based
laboratory services by revenue in Ontario. It currently performs over 31% of all
private sector community-based laboratory services in Ontario. The Labs Business
currently holds licences for the full range of laboratory services for which
licences are available from the MOH, thereby allowing it to perform virtually
any laboratory service that could be ordered by a health care professional.
The Labs Business generated revenues of approximately $200 million for each
of the fiscal years of MDS ended October 31, 2002 and 2003, over 86% of which
were paid by the MOH on the basis determined under agreements between the MOH
and the OAML. EBITDA for the Labs Business for the fiscal years ended October
31, 2002 and 2003 were approximately $52 million and $48 million, respectively.
EBITDA, as used in respect of the Labs Business in these projections, is not
necessarily comparable with similarly titled measures of other businesses
because not all businesses calculate EBITDA in the same fashion.
74
The following diagram illustrates the operation of the Labs Business:
(LABS BUSINESS OPERATIONS DIAGRAM)
Specimen Collection Network
A specimen is a unit of a bodily substance upon which a laboratory service
or test is performed, such as blood or urine or a sample of tissue. The Labs
Business collects specimens for testing in two principal ways: (i) through the
operation of patient service centres ("PSCs") that collect specimens for testing
from patients referred by nearby health care professionals and (ii) directly
from physicians' offices. The financial success of a Community Laboratory is
dependent upon having a large volume of requisitioned tests which in turn is
dependent upon having an existing network of PSCs.
The Labs Business has a network of over 120 PSCs across Ontario. Each PSC
has a specimen collection licence issued by the MOH. The PSCs are staffed by
Labs Business employees and are often located in or near medical buildings where
offices of health care professionals are located. Once a specimen is taken from
a patient, it is prepared for testing and entered into the integrated computer
network operated by the Labs Business to allow for automatic processing and
reporting of test results. Approximately 60% of the Labs Business' specimens are
collected from PSCs.
In addition to its PSCs, the Labs Business also collects specimens drawn or
collected from patients in the offices of health care professionals. In these
cases, the specimen is drawn or collected directly by the health care
professional and then is delivered to the PSC either by a courier system
operated by the Labs Business or by the collecting office. Approximately 40% of
the Labs Business' specimens are collected from physicians' offices.
Courier Network
Because of its size, the Labs Business is able to capitalize on economies
of scale by operating its own courier system to ensure the prompt and reliable
transfer of specimens from offices of health care professionals and its PSCs to
its laboratories. The courier system operates on a comprehensive scheduling
system.
Laboratories
The Labs Business operates one high volume central laboratory (the "Central
Laboratory") and six smaller regional laboratories (each a "Regional
Laboratory").
The Central Laboratory is located in Etobicoke, Ontario. It operates 24
hours per day, seven days per week, utilizing automated diagnostic testing
equipment that allows high-volume testing to be conducted quickly and
75
efficiently. The Central Laboratory holds laboratory licences issued by the MOH
for the full range of tests that are approved by the MOH and can process up to
35,000 specimens a day. The Central Laboratory conducts over 60% of all testing
conducted by the Labs Business, with the balance being carried out at the
Regional Laboratories.
The Regional Laboratories are used when testing is required on an immediate
basis and the time frames involved make it impracticable or impossible to
transport the specimen to the Central Laboratory. The Labs Business maintains
six Regional Laboratories in Ontario located in Belleville, London, Ottawa,
Sudbury, Thorold and Thunder Bay. The Regional Laboratories hold laboratory
licences for a more limited range of tests.
The Laboratory Information System
Underlying the entire laboratory services process is the Labs Business'
Laboratory Information System (the "LIS"). The LIS is an integrated computer
network that tracks specimens from the time they are collected to the time the
results are reported to the physician. When specimens are drawn, each of the
tests requisitioned for that specimen by the physician is entered into the LIS
and a bar code is generated for that specimen. When a specimen arrives at one of
the laboratories, the highly automated testing process reads the bar code,
divides the specimen (if required), conducts the required tests, electronically
collates all of the results and then reports the consolidated testing results to
the referring physician.
Reporting of Results
The Labs Business maintains data transmission systems that allow test
results to be transmitted directly to physicians and various medical office
systems via the Internet, fax or mail. Test results are reported to physicians
as quickly as possible and, in most cases, results are reported within 24 hours
of specimen collection.
Strategy
The goal of the Labs Partnership is to be the leading provider of
laboratory testing services in Ontario by continuing to operate the Labs
Business efficiently and selectively pursuing opportunities for growth that are
expected to be accretive.
Historically, in the absence of acquisitions, organic revenue growth of the
Labs Business has been driven by the increasing demand for laboratory services
resulting in the negotiated expansion of the industry cap and the individual
corporate cap under agreements negotiated between the MOH and the OAML. The Labs
Partnership intends to pursue additional growth opportunities by expanding the
number and type of tests that it can provide and, where justified, seeking
increased compensation for the testing that it currently provides.
Competitive Advantages
The Labs Partnership believes that its competitive advantages include the
following:
- Benefits from MDS. The Labs Partnership has the benefit of MDS's
long-term relationships with physicians, hospitals and other significant
clients with the expectation of continued testing referrals and current
supplier arrangements. In addition, the Labs Partnership expects to
continue to benefit from the purchasing power of MDS and will continue
to obtain supplies through this source.
- Technology and Operations Investment. The Labs Partnership management
is committed to investing in technology to operate its business
effectively and efficiently. The Central Laboratory, located in
Etobicoke, Ontario is equipped with highly automated instrumentation.
Through technology and operational efficiency, the Labs Partnership
management has improved the cost of its operating structure and is
pursuing further cost reductions. In addition, management believes that
it has a substantial amount of operational expertise gained through more
than 30 years of providing laboratory services.
- Stable Revenue Stream. Substantially all of the Labs Partnership's
revenue will be received from the MOH, subject to both an industry and
corporate cap, as discussed above. The Labs Partnership's management
believes that the Labs Business will continue to generate a stable
revenue stream.
Regulatory Matters
The licensing and regulatory requirements of the Labs Business relate to,
among other matters, conduct of testing and reporting of results, the handling
and disposal of medical specimens, infectious and hazardous waste and other
materials, the safety and health of laboratory employees and the proficiency of
staff.
76
The MOH has granted two types of licence to MDS in connection with the Labs
Business: a specimen collection licence and a laboratory licence. Specimen
collection licences authorize the collection of specimens. Subject to the
approval of the MOH, licensees have the ability to transfer specimen collection
centre licences from one location to another. Laboratory licences permit the
actual testing and payment for such testing. Laboratory licences may not be
transferred to other persons or other locations without the approval of the MOH.
MOH approval will be required in connection with, and will be a condition to the
completion of, the Arrangement, since these licences will be transferred from
MDS to the Labs Partnership. MDS has discussed the Arrangement with the MOH and
expects that such approval will be granted.
A licence can be revoked if prescribed standards are not met. Licensees are
subject to spot audits conducted by the Ontario Medical Association and by the
MOH. To date, MDS has never had a licence revoked. No new Community Laboratory
licences have been issued since the first licences were issued in 1974, and
these licences are accordingly of significant value. The restriction on
licensing constitutes a barrier to entry into and, together with a funding model
based on industry caps and individual corporate caps, a barrier to expansion
within the community-based laboratory business in Ontario through any means
other than the acquisition of existing licensed businesses. It is the Labs
Partnership's intention that its Community Laboratories continue to hold
licences with a full range of permitted tests, thereby allowing the Labs
Partnership to perform virtually all tests referred by physicians.
In addition to the licensing of its laboratories, the Labs Business is also
subject to regulation relating to the use, transportation and disposal of
hazardous materials, including biomedical and pathological waste, infectious
product and chemical and radioactive materials. The Government of Ontario issues
licences and registrations for operations within the province. The Federal
Government has jurisdiction over transportation of dangerous goods, including
certain defined toxic substances and radioactive substances. Penalties for
infractions of environmental regulations have been steadily increasing in Canada
in recent years and emission, discharge and licensing standards have become
increasingly stringent.
The Labs Business is also subject to occupational health and safety
legislation in Ontario. Laboratory workers are subject to the Healthcare and
Residential Facilities Regulation made under the Occupational Health and Safety
Act (Ontario) which imposes extensive workplace safety requirements on health
care employers, including operators of clinical laboratories whose workers may
be exposed to blood-borne pathogens such as HIV and Hepatitis B virus. This
regulation requires, among other things, work practice controls, protective
clothing and equipment, training, voluntary medical surveillance and other
measures designed to minimize exposure to, and transmission of, blood-borne
pathogens.
Facilities
The Central Laboratory is a 55,000 square foot space located in Etobicoke,
Ontario which is currently owned by MDS and will be leased by MDS to the Labs
Partnership during the term of the Labs Partnership on normal commercial terms.
Each of the six Regional Laboratories is either leased from a third party
(in which case the lease will be assigned by MDS to the Labs Partnership on the
Effective Date) or is owned by MDS (in which case the laboratory will be leased
by MDS to the Labs Partnership on the Effective Date on normal commercial
terms). These laboratories range in size from approximately 3,500 to 7,000
square feet and have leases expiring from November 2005 to October 2009, subject
to renewal rights.
Each of the Labs Partnership's PSCs is leased. The leases are all on normal
commercial terms and the majority of these leases contain exclusivity clauses
that ensure MDS will be the only PSC in the particular building. The PSCs range
in size from approximately 200 to 3,600 square feet. No individual PSC lease is
material to the Labs Business.
The current terms of these leases are scheduled to expire, subject to
rights of renewal, as follows:
<Table>
<Caption>
CALENDAR YEAR NUMBER OF LEASES
- ------------- ----------------
2004........................................................ 35
2005........................................................ 23
2006........................................................ 18
2007 or later............................................... 51
</Table>
77
The following table summarizes the location of the PSCs forming part of the Labs
Business:
<Table>
<Caption>
NUMBER OF
REGION PSCS
- ------ ---------
Greater Toronto Area - Kitchener............................ 44
Central North Ontario....................................... 25
North Ontario............................................... 12
Hamilton-Niagara............................................ 19
South West Ontario.......................................... 12
Eastern Ontario............................................. 15
</Table>
It is anticipated that, upon completion of the Arrangement, all of the PSC
leases will be assigned or subleased to the Labs Partnership. However, it is
possible that certain PSC leases may not be transferred on the Effective Date
due to delays in obtaining landlord consent to the assignment of such leases.
MDS will covenant in the Labs Contribution Agreement to obtain lease
assignments, or if appropriate, to cause the Labs Limited Partnership to enter
into new leases, in each case to effect the transfer of these remaining PSC
leases to the Labs Partnership as soon as is commercially reasonable after the
Effective Time.
Employees
As at December 31, 2003, the Labs Business had over 2,800 employees, none
of whom is covered by a collective agreement. On January 1, 2004, MDS
transferred all employees that are employed by MDS solely in the Labs Business,
to MDS Subco. Following the Arrangement, MDS will also provide the Labs
Partnership with certain support services under the Labs Management Agreement
(see "-- Labs Management Agreement" above).
Lending
As part of the Arrangement, MDS will provide an operating advance to the
Labs Partnership of approximately $10 million to cover working capital until
such time as the Labs Business generates self-sustaining cash flow. This advance
will be repaid from cash flow generated by the Labs Partnership, which is
expected to take approximately four months from the Effective Date.
Competition
In Ontario, the laboratory services market is highly concentrated with
three providers, being the Labs Business, CML Healthcare Inc. and Gamma-Dynacare
Medical Laboratories accounting for more than 90% of the market. The laboratory
services industry in Ontario has high barriers to entry for new competitors,
which barriers include the licensing process and ongoing regulatory
requirements, the number of locations required for specimen collection and the
fixed allocation of corporate cap from the MOH. Given the highly concentrated
market and high barriers to entry, the principal means of competition among the
major providers continues to be differentiation based on quality and service and
a focus on cost efficiency in operations.
Legal Proceedings
In the normal course of business, the Labs Business is subject to claims
and is involved in various legal proceedings. The Labs Business is not currently
involved in any material legal proceedings nor is it aware of any pending or
threatened proceedings that would have a material adverse effect upon the
financial condition or results of operations of the Labs Business.
UNAUDITED SUMMARY FINANCIAL INFORMATION CONCERNING THE LABS BUSINESS
SOURCE OF UNAUDITED SUMMARY FINANCIAL INFORMATION
The following unaudited summary financial information relating to the Labs
Business is derived from the financial records of MDS that were used to prepare
the audited consolidated statements of financial position of MDS as at October
31, 2003 and the audited consolidated statements of income of MDS for the fiscal
years ended October 31, 2003, 2002 and 2001. The opinion issued by the auditors
of MDS with respect to the audit of such MDS consolidated financial statements
was issued without a reservation of opinion. However, the auditors of MDS have
not reviewed, and express no opinion with respect to, the unaudited summary
financial information relating to the Labs Business provided herein.
78
BASIS OF PRESENTATION
During the foregoing periods, the Labs Business operated as a branch within
a division of MDS and, as such, separate financial statements have not been
historically required or prepared for the Labs Business.
Revenues and Operating Income
The following unaudited summary financial information represents
management's estimates of the revenues and operating income attributable to the
Labs Business for the fiscal years of MDS ended October 31, 2003, 2002 and 2001.
In reviewing the following estimates of the revenues and operating income,
Securityholders should be aware of the material assumptions made by management
in their preparation, which are noted below.
REVENUES AND OPERATING INCOME (UNAUDITED)
FOR THE YEAR ENDED OCTOBER 31 ($ IN THOUSANDS)
<Table>
<Caption>
2003 2002 2001
------- ------- -------
Revenue..................................................... 200,733 199,108 187,967
Operating expenses(1)....................................... 149,897 143,981 133,973
Amortization................................................ 3,213 3,301 4,456
------- ------- -------
Earnings before interest and taxes(2)....................... 47,623 51,826 49,538
======= ======= =======
</Table>
- ---------------
Notes:
(1) Interest income/expense for MDS has not historically been recorded by
individual divisions due to a centralized cash pooling arrangement of MDS.
Accordingly, no interest income/expense has been included.
(2) Income tax expense has been provided for MDS as a whole but has not been
provided for the Labs Business separately. An estimate of the Labs Business
share of MDS's tax liability in 2003, 2002 and 2001 would be arbitrary and
not necessarily indicative of the income tax expense of the Labs
Partnership going forward. Accordingly, no such income tax expense has been
included.
Financial Position
The following unaudited summary financial information represents
management's estimates of the financial position of the Labs Business as at
October 31, 2003 which reflects the Labs Assets. In reviewing the following
estimates of the financial position of the Labs Business, Securityholders should
be aware of the material assumptions made by management in their preparation,
which are noted below.
FINANCIAL POSITION (UNAUDITED)(1)(2)
AS AT OCTOBER 31, 2003 ($ IN THOUSANDS)
<Table>
<Caption>
2003
-------
Inventories................................................. 2,232
Prepaid expenses............................................ 326
-------
2,558
Capital assets(3)........................................... 10,292
Goodwill(3)................................................. 20,704
-------
Total Assets................................................ 33,554
=======
Retained earnings........................................... 33,554
-------
Total liabilities and shareholders' equity.................. 33,554
=======
</Table>
- ---------------
Notes:
(1) No cash, accounts receivable or accounts payable are being transferred to
the Labs Partnership. MDS intends to provide the Labs Partnership with a
$10 million advance to fund its working capital requirements until such
time as the Labs Partnership is able to fund its own cash requirements
through revenue generated from the Labs Business.
(2) All billings to the MOH for services provided commencing on and after the
Effective Date will be collected by the Labs Partnership. Similarly, all
expenses incurred on and after the Effective Date will be paid by the Labs
Partnership. Based on current collection and payment terms, average
accounts receivable and accounts payable balances of the Labs Partnership
are expected to be approximately $30 million and $10 million, respectively.
(3) This does not include assets and goodwill in respect of certain leased
locations of the Labs Business which will not be transferred to the Labs
Partnership on the Effective Date. It is intended that such assets will be
transferred to the Labs Partnership as soon as is commercially reasonable
after the Effective Time.
79
FUTURE IMPACT OF RESULTS OF LABS BUSINESS ON LABCO
Labco will hold a 99.99% interest in the Labs Partnership and will be
entitled to 99.99% of the partnership distributions of net income by the Labs
Partnership from and after the Effective Date. Labco intends to account for the
acquisition of the Labs Partnership Interest using the equity method since Labco
will own only a limited partnership interest (as opposed to a general
partnership interest) in the Labs Partnership and management and control of the
Labs Partnership will reside with MDS through MDS Subco, as general partner of
the Labs Partnership.
The Labs Partnership Agreement provides that additional limited partners
may be admitted to, and be issued limited partnership units of, the Labs
Partnership following the satisfaction of certain conditions, including the
passing of a special resolution by the existing limited partners. The Labs
Partnership does not have a current intention to issue limited partnership units
to any other party.
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis (the "MD&A") of the
results of operation for the Labs Business for MDS's fiscal year ended October
31, 2003, as prepared by management of the Labs Business.
The MD&A should be read in conjunction with the unaudited summary financial
information under "Unaudited Summary Financial Information Concerning the Labs
Business" above. The unaudited summary financial information is management's
estimate of the results attributable to the Labs Business. However, as the Labs
Business has been operated as a branch within a division of MDS and not as a
stand-alone business, no expenses that would be incurred by a stand-alone
business such as income taxes, interest income/expense and costs associated with
public company reporting and other obligations associated with being a public
company have been allocated to the Labs Business. Readers are cautioned that the
summary financial information presented herein is unaudited and may not be
appropriate for their purposes.
The MD&A is intended to provide readers with information that management of
the Labs Business believes is important to an understanding of the financial
results of the Labs Business for the periods and as at the dates provided and to
assessing the future prospects of the Labs Partnership. Accordingly, the MD&A
contains forward-looking statements. These forward-looking statements are
affected by risks and uncertainties that are discussed under "Risk Factors --
Risks Relating to the Labs Partnership". Readers are cautioned that actual
events and results will vary from those provided herein.
Effective April 1, 2003, a new two-year fee agreement between the OAML and
the MOH was signed for laboratory services. This agreement increased the funding
for Community Laboratories testing services in Ontario by $20 million to $526
million for the year ending March 31, 2004 and by an additional $27 million to
$553 million for the year ending March 31, 2005. As part of this new agreement,
the MOH agreed to a one-time amount of $10 million pending the satisfaction of
certain conditions to be satisfied by the OAML members. The Labs Business'
current share of the increased fee amounts is approximately 31%.
REVIEW OF OPERATING RESULTS
<Table>
<Caption>
2003 2002 2001
---- ---- ----
($ in millions)
(unaudited)
Revenue..................................................... 201 199 188
=== === ===
</Table>
Revenue increased by 1.0% in 2003 over 2002, reflecting an increase in the
corporate cap for MOH funding, offset by a one-time payment of $3 million
recorded in the comparative 2002 revenue. Revenue increased by 5.9% in 2002,
reflecting an increase in the corporate cap and the one-time adjustment.
80
The revenue recognition policy of the Labs Business is to recognize the
lower of the corporate cap or the amount based on services performed. Services
in excess of the corporate cap were performed for the MOH in the years ended
March 31, 2003, 2002 and 2001.
<Table>
<Caption>
2003 2002 2001
---- ---- ----
($ in millions)
(unaudited)
Operating expenses.......................................... 150 144 134
=== === ===
</Table>
Operating expenses increased by 4.2% in 2003 as a result of higher salary
and benefit costs. Operating expenses increased by 7.5% in 2002 as a result of
higher salary and benefit costs.
<Table>
<Caption>
2003 2002 2001
---- ---- ----
($ in millions)
(unaudited)
$ $ $
Amortization................................................ 3 3 4
=== === ===
</Table>
Amortization expense decreased in 2002 from 2001 as a result of goodwill no
longer being amortized in accordance with the Canadian Institute of Chartered
Accountants Handbook requirements.
81
REGULATORY MATTERS
SECURITIES LAW MATTERS
CANADA
Application will be made for certain regulatory approvals or waivers from
the Canadian Securities Administrators to ensure that, after the Arrangement,
the New Hemosol Shares, the Labco Class A Shares and the Labco Class B
Non-Voting Shares will be as freely tradeable in or into Canada as are the
Hemosol Shares currently. Assuming such approvals or waivers are obtained (and
Hemosol has no reason to believe that they will not be obtained), (i) New
Hemosol Shares, Labco Class A Shares and Labco Class B Non-Voting Shares issued
pursuant to the Arrangement, (ii) New Hemosol Shares issued upon the exercise of
the New Hemosol Convertible Securities issued pursuant to the Arrangement, and
(iii) New Hemosol Shares issued upon the exercise of the New Hemosol Options
issued pursuant to the Arrangement will, in each case, be freely tradeable in or
into Canada through appropriately registered dealers provided the following
conditions, among others, are met at the time of such trade: (i) Labco or New
Hemosol, as applicable, is a reporting issuer; (ii) the trade is not a "control
distribution" within the meaning of Multinational Instrument 45-102 of the
Canadian Securities Administrators (i.e. the selling shareholder does not hold
(alone or in combination with others) more than 20% of the outstanding voting
securities of Labco or New Hemosol, as applicable, and does not otherwise hold a
sufficient number of any securities of Labco or New Hemosol, as applicable, to
affect materially the control of Labco or New Hemosol, as applicable); (iii) no
unusual effort is made to prepare the market or create a demand for the New
Hemosol Shares, the Labco Class A Shares or the Labco Class B Non-Voting Shares,
as applicable; (iv) no extraordinary commission or consideration is paid to a
person or company in respect of the trade in the New Hemosol Shares, the Labco
Class A Shares or the Labco Class B Non-Voting Shares, as applicable; and (v) if
the selling shareholder is an insider or officer of Labco or New Hemosol, as
applicable, the selling security holder has no reasonable grounds to believe
that Labco or New Hemosol, as applicable, is in default of securities
legislation.
UNITED STATES
The Labco Class A Shares, the Labco Class C Shares and the New Hemosol
Shares to be issued pursuant to the Arrangement will not be registered under the
U.S. Securities Act in reliance upon the exemption from registration provided by
section 3(a)(10) thereof.
Labco Class A Shares issued to a Shareholder pursuant to the Arrangement
may be resold without restriction under the U.S. Securities Act, except for
Labco Class A Shares issued to any Shareholder who is an affiliate of Labco
following consummation of the Arrangement or who was an affiliate of Hemosol or
MDS prior to consummation of the Arrangement. Securityholders who are affiliates
of Labco after consummation of the Arrangement may publicly sell Labco Class A
Shares in the U.S. only in compliance with the restrictions of Rule 144 under
the U.S. Securities Act. Securityholders who are not affiliates of Labco but
were affiliates of Hemosol or MDS prior to the consummation of the Arrangement
may publicly sell Labco Class A Shares in the U.S. following consummation of the
Arrangement only in compliance with the restrictions of Rule 145 under the U.S.
Securities Act. In addition, these affiliates may publicly sell Labco Class A
Shares outside the U.S. in compliance with the restrictions of Regulation S
under the U.S. Securities Act. The foregoing does not address requirements or
restrictions, if any, under securities or Blue Sky laws of the states of the
U.S. applicable to the resale of Labco Class A Shares.
New Hemosol Shares issued to a Shareholder pursuant to the Arrangement may
be resold without restriction under the U.S. Securities Act, except for New
Hemosol Shares issued to any Shareholder who is an affiliate of New Hemosol
following consummation of the Arrangement or who was an affiliate of Hemosol or
MDS prior to consummation of the Arrangement. Securityholders who are affiliates
of New Hemosol after consummation of the Arrangement may publicly sell New
Hemosol Shares in the U.S. only in compliance with the restrictions of Rule 144
under the U.S. Securities Act. Securityholders who are not affiliates of New
Hemosol but were affiliates of Hemosol or MDS prior to the consummation of the
Arrangement may publicly sell New Hemosol Shares in the U.S. following
consummation of the Arrangement only in compliance with the restrictions of Rule
145 under the U.S. Securities Act. In addition, these affiliates may publicly
sell New Hemosol Shares outside the U.S. in compliance with the restrictions of
Regulation S under the U.S. Securities Act.
82
For purposes of this discussion, an "affiliate" is any person that directly
or indirectly controls, or is controlled by or is under common control with
Labco, MDS, Hemosol or New Hemosol, as the case may be. Securityholders who may
be affiliates for these purposes should consult their own legal advisors prior
to the sale of Labco Class A Shares or New Hemosol Shares, as the case may be.
New Hemosol Shares issuable upon exercise of New Hemosol Options will be
registered under the U.S. Securities Act through the filing of a registration
statement on Form S-8. New Hemosol Shares so registered, when issued upon
exercise of such options, other than shares issued to any affiliate of New
Hemosol, will be eligible to be resold publicly in the U.S. without restriction.
New Hemosol currently expects that the necessary registration statement will
become effective concurrently with the Arrangement, and that holders of New
Hemosol Options will be able to exercise such options for freely tradeable New
Hemosol Shares as soon as the Arrangement becomes effective. Affiliates of New
Hemosol who receive New Hemosol Shares upon exercise of New Hemosol Options may
publicly sell these shares in the U.S. only in compliance with the restrictions
of Rule 144 under the U.S. Securities Act and outside the U.S. in compliance
with the restrictions of Regulation S.
OSC RULE 61-501 AND AMF POLICY Q-27
The Arrangement is a "going private transaction" and a "related party
transaction" within the meaning of Rule 61-501 and Policy Q-27. Rule 61-501 and
Policy Q-27 establish rules which are intended to ensure that transactions such
as the Arrangement are both substantively and procedurally fair to minority
shareholders.
VALUATION EXEMPTION
Rule 61-501, Policy Q-27 and the OBCA provide that a corporation proposing
to carry out a going private or related party transaction is required, in most
circumstances, to prepare a formal valuation of the subject matter of a proposed
transaction and to provide to the holders of the corporation's securities a
summary of such valuation, unless specified circumstances exist and are fully
disclosed in the proxy materials.
On December 17, 2003, Hemosol filed an application for exemptive relief
from the formal valuation requirements of Rule 61-501, Policy Q-27 and the OBCA
under the Mutual Reliance Review System with the OSC as the principal regulator.
An MRRS Decision Document was issued pursuant to which the requirement to obtain
a formal valuation does not apply to Hemosol in connection with the Arrangement.
MINORITY APPROVAL
Rule 61-501 and Policy Q-27 also provide that a "going private transaction"
or a "related party transaction" such as the Arrangement must be approved by a
majority of the votes cast by holders of securities, excluding holders of
securities whose votes cannot be included for the purposes of minority approval,
as that term is defined in Rule 61-501 and Policy Q-27. Under Rule 61-501 and
Policy Q-27, as applied to the Arrangement, minority approval of the Arrangement
Resolution would require the approval by a majority of all the votes cast by
Minority Shareholders. To the knowledge of Hemosol, for purposes of the minority
approval requirement, the Minority Shareholders are comprised of all
Shareholders except MDS, MDS Health Ventures (TC) Inc. and two entities for
which MDS Capital Corp. and/or its affiliates provide management services who as
at March 1, 2004 held an aggregate of 7,362,143 Hemosol Shares. A breakdown of
the Hemosol Shares held by MDS and its affiliates is provided in the section
"General Proxy Matters -- Voting Securities and Principal Holders Thereof" of
this Circular.
FINANCIAL INFORMATION EXEMPTION
As the acquisition by Labco from MDS of the Labs Partnership Interest (the
"Acquisition"), which is, in effect, an indirect acquisition of the Labs
Business by Labco, constitutes a "significant probable acquisition" by Labco for
the purposes of OSC Rule 41-501 -- General Prospectus Requirements ("Rule
41-501") and National Instrument 44-101 -- Short Form Prospectus Distributions
("NI 44-101"), absent an exemption, this Circular must include certain audited
historical financial information and certain pro forma information concerning
the Labs Business.
On January 9, 2004, MDS and Hemosol filed a joint application for exemptive
relief from the requirement to include such audited historical financial
information and certain pro forma information in this Circular under the Mutual
Reliance Review System with the OSC as the principal regulator. An MRRS Decision
Document was issued pursuant to which the requirement to include such audited
historical financial information and certain pro
83
forma information in the Circular does not apply to Hemosol or Labco in
connection with the Arrangement, provided that the Circular contains the summary
financial information and related disclosure as set out in "Labco After the
Arrangement -- Selected Labco Pro Forma Financial Information".
COMPETITION ACT (CANADA)
Under the Competition Act (Canada), as amended (the "Competition Act"),
transactions that exceed certain financial thresholds require prior notification
to the Commissioner of Competition under the Competition Act (the
"Commissioner"). If a transaction is subject to the notification requirement (a
"Notifiable Transaction"), it may not be completed until the applicable
statutory waiting period has expired or the Commissioner has either issued an
ARC or, in lieu of an ARC waived the filing obligation.
The parties had a choice of filing a short-form filing (in respect of which
there is a 14-day statutory waiting period), a long-form filing (in respect of
which there is a 42-day statutory waiting period) or alternatively, a request
for an advance ruling certificate (an "ARC") by the Commissioner under section
102 of the Competition Act and, in lieu of an ARC, a waiver of the filing
obligation. Where an ARC is issued and the Notifiable Transaction to which the
ARC relates is substantially completed within one year after the ARC is issued,
the Commissioner cannot seek an order of the Competition Tribunal in respect of
the Notifiable Transaction solely on the basis of information that is the same
or substantially the same as the information on the basis of which the ARC was
issued.
As the Arrangement constitutes a Notifiable Transaction, on February 25,
2004, MDS filed a request for an ARC in respect of the Arrangement and an ARC
was issued by the Commissioner on March 10, 2004.
HSR ACT
The Arrangement is not subject to the notification, waiting period or other
requirements of the United States Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
84
INCOME TAX CONSIDERATIONS
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of DWPV, the following are fair summaries of the principal
Canadian federal income tax consequences of the Arrangement generally applicable
to the holders of Hemosol Shares and Hemosol Warrants. The summaries are based
on the current provisions of the Tax Act, the regulations thereunder, counsel's
understanding of the current administrative practices of CCRA and the Tax Ruling
issued in respect of the consequences under the Tax Act of certain of the
transactions forming part of the Arrangement. The summaries take into account
all specific proposals to amend the Tax Act and the regulations publicly
announced by or on behalf of the Minister of Finance (Canada) prior to the date
hereof. The summaries do not otherwise take into account or anticipate any
changes in law, whether by judicial, governmental or legislative decision or
action, or any changes in the administrative practices of CCRA, nor do they take
into account provincial, territorial, or foreign income tax legislation or
considerations.
The Tax Act contains certain provisions relating to securities held by
certain financial institutions (the "mark-to-market rules"). The summaries do
not take into account the mark-to-market rules and any holder of Hemosol Shares
or Hemosol Warrants that is a "financial institution" for the purpose of those
rules should consult its own tax advisors. The summaries do not take into
account the consequences of the Arrangement to a holder an interest in which is
a "tax shelter investment" for purposes of the Tax Act.
THE SUMMARIES ARE OF A GENERAL NATURE ONLY AND ARE NOT INTENDED TO BE, NOR
SHOULD THEY BE CONSTRUED TO BE, LEGAL OR TAX ADVICE OR REPRESENTATIONS TO ANY
PARTICULAR HOLDER OF HEMOSOL SHARES OR HEMOSOL WARRANTS. ACCORDINGLY, SUCH
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR PARTICULAR
CIRCUMSTANCES.
HOLDERS RESIDENT IN CANADA
The following summary is applicable only to a holder of Hemosol Shares or
Hemosol Warrants who, at all relevant times, for purposes of the Tax Act is or
is deemed to be resident in Canada, holds Hemosol Shares, Hemosol Warrants,
Labco Class A Shares and Labco Class C Shares acquired in exchange for Hemosol
Shares or New Hemosol Shares acquired in exchange for Labco Class C Shares as
capital property and both deals at arm's length with, and is not affiliated
with, Hemosol or Labco (as the case may be), New Hemosol or MDS. Hemosol Shares,
Hemosol Warrants and New Hemosol Shares will generally be considered to be
capital property to the holder unless the holder holds such shares in the course
of carrying on a business, or has acquired them in a transaction or transactions
considered to be an adventure in the nature of trade.
Exchange of Hemosol Shares for Labco Class A Shares and Labco Class C Shares
Each holder of Hemosol Shares will be deemed to have disposed of the
Hemosol Shares, on their exchange for Labco Class A Shares and Labco Class C
Shares, for proceeds of disposition equal to the adjusted cost base to the
holder of the holder's Hemosol Shares so that the holder will realize no capital
gain or capital loss on the exchange. The cost to a holder of Hemosol Shares of
the Labco Class A Shares or Labco Class C Shares received on the exchange will
be that proportion of the adjusted cost base to the holder of the Hemosol Shares
that the fair market value of the Labco Class A Shares or Labco Class C Shares
received, as the case may be, is of the aggregate fair market value of all Labco
Class A Shares and Labco Class C Shares received by the holder on the exchange.
Such holder of Hemosol Shares will not be deemed to receive any dividend for
purposes of the Tax Act with respect to the exchange.
Exchange of Labco Class C Shares for New Hemosol Shares
A holder who receives New Hemosol Shares in exchange for Labco Class C
Shares will realize neither a capital gain nor a capital loss by virtue of that
exchange unless the holder chooses to include in computing income for the
taxation year in which the exchange occurs any portion of the capital gain or
capital loss otherwise determined. On the exchange of Labco Class C Shares for
New Hemosol Shares, the holder will be deemed to have disposed of the Labco
Class C Shares for proceeds of disposition equal to their adjusted cost base to
the holder immediately before the exchange, and to have acquired the New Hemosol
Shares at a cost equal to that same
85
adjusted cost base, unless the holder chooses to include in computing income any
portion of the capital gain or capital loss otherwise determined.
A holder who exchanges Labco Class C Shares for New Hemosol Shares and who,
in such holder's income tax return for the taxation year in which the exchange
occurs, includes in computing income any portion of the capital gain or capital
loss otherwise determined from the exchange, will be considered to have disposed
of all Labco Class C Shares so exchanged for proceeds of disposition equal to
the fair market value of the New Hemosol Shares received on the exchange and to
have acquired such New Hemosol Shares at a cost equal to that same fair market
value.
Exchange of Hemosol Warrants
A holder who receives New Hemosol Convertible Securities in exchange for
Hemosol Warrants will be deemed to have disposed of such Hemosol Warrants for
proceeds of disposition equal to the fair market value of the New Hemosol
Convertible Securities received and to have acquired the New Hemosol Convertible
Securities at a cost equal to that same fair market value.
Dividends on Labco Class A Shares and New Hemosol Shares
Dividends received (or deemed to be received) on the Labco Class A Shares
or New Hemosol Shares by a holder who is an individual will be included in
computing the individual's income and will be subject to the gross-up and
dividend tax credit rules generally applicable to taxable dividends received
from taxable Canadian corporations. Taxable dividends received by an individual
may give rise to alternative minimum tax under the Tax Act, depending on the
individual's circumstances.
Dividends received (or deemed to be received) on the Labco Class A Shares
or New Hemosol Shares by a holder that is a corporation will be included in
computing the corporation's income and will generally be deductible in computing
its taxable income.
A "private corporation" (as defined in the Tax Act) or any other
corporation resident in Canada and controlled by or for the benefit of an
individual or related group of individuals may be liable to tax under Part IV of
the Tax Act to pay a refundable tax of 33 1/3% on dividends received on the New
Hemosol Shares or Labco Class A Shares to the extent that such dividends are
deductible in computing the shareholder's taxable income.
Dispositions
A holder who disposes of, or is deemed to dispose of, Hemosol Warrants,
Labco Class A Shares or New Hemosol Shares will generally realize a capital gain
(or a capital loss) to the extent that the proceeds of disposition, net of any
reasonable costs of disposition, exceed (or are less than) the adjusted cost
base of such shares or warrants to such holder. If the holder is a corporation,
any capital loss arising on the disposition of a Labco Class A Share or New
Hemosol Share, as the case the may be, may be reduced in certain circumstances
by the amount of any dividends which have been received or been deemed to be
received on the relevant share. Analogous rules apply to a partnership or trust
of which a corporation, trust or partnership is a member or beneficiary.
Capital Gains and Capital Losses
One-half of any capital gain (a "taxable capital gain") realized by a
holder in a taxation year must be included in the holder's income in that year
and one-half of any capital loss (an "allowable capital loss") realized by a
holder in a taxation year will be deducted from the holder's taxable capital
gains in that year. Allowable capital losses in excess of taxable capital gains
generally may be carried back and deducted in any of the three preceding
taxation years or carried forward and deducted in any subsequent year against
net taxable gains realized in such years to the extent and under the
circumstances described in the Tax Act.
Capital gains realized by an individual may give rise to a liability for
minimum tax under the Tax Act. A Canadian-controlled private corporation, as
defined in the Tax Act, may be subject to an additional refundable tax of 6 2/3%
on investment income (including taxable capital gains).
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HOLDERS NOT RESIDENT IN CANADA
The following summary is generally applicable to a holder of Hemosol Shares
or Hemosol Warrants who, at all relevant times, for purposes of the Tax Act and
any applicable tax treaty or convention, is not resident in Canada, holds
Hemosol Shares, Hemosol Warrants, Labco Class A Shares and Labco Class C Shares
acquired in exchange for Hemosol Shares or New Hemosol Shares acquired in
exchange for Labco Class C Shares as capital property, deals at arm's length
with, and is not affiliated with, Hemosol or Labco (as the case may be), New
Hemosol and MDS and does not use or hold, and is not deemed to use or hold, such
shares or warrants in carrying on, or otherwise in connection with, a business
in Canada, and is not a non-resident insurer for purposes of the Tax Act. The
following summary assumes that the Labco Class C Shares will be listed on the
TSX at the Effective Time.
Exchanges of Shares
No capital gain or capital loss will be realized by a holder on the
exchange of Hemosol Shares for Labco Class A Shares and Labco Class C Shares or
on the exchange of a Labco Class C Share for a New Hemosol Share. Neither
exchange will give rise to a deemed dividend to the holder.
Dividends
Dividends paid or credited, or deemed to be paid or credited, to a holder
of Labco Class A Shares or New Hemosol Shares will be subject to withholding tax
under the Tax Act at a rate of 25%, subject to reduction under the provisions of
an applicable tax treaty or convention. For example, under the Canada-United
States Income Tax Convention (1980) (the "U.S. Treaty"), the applicable rate of
dividend withholding tax is generally reduced to 15%.
Exchange of Hemosol Warrants
A holder who receives New Hemosol Convertible Securities in exchange for
Hemosol Warrants will be deemed to have disposed of such Hemosol Warrants for
proceeds of disposition equal to the fair market value of the New Hemosol
Convertible Securities received and to have acquired the New Hemosol Convertible
Securities at a cost equal to that same fair market value.
Disposition of Hemosol Warrants
A holder of Hemosol Warrants which are not "taxable Canadian property" (as
defined in the Tax Act) will not be subject to tax under the Tax Act on the
disposition of such warrants. Generally, Hemosol Warrants will not be taxable
Canadian property to a holder at a particular time if, during the 60-month
period immediately preceding the disposition of the Hemosol Warrants, the
holder, persons with whom the holder did not deal at arm's length, or the
holder, together with such persons, did not own options or warrants or other
interests in or other options in respect of 25% or more of the issued shares of
any class or series of shares of the capital stock of Hemosol.
Disposition of Acquired Shares
A holder of New Hemosol Shares which are not "taxable Canadian property"
(as defined in the Tax Act) will not be subject to tax under the Tax Act on the
disposition of such shares. Generally, New Hemosol Shares will not be taxable
Canadian property to a holder at a particular time if:
(a) the New Hemosol Shares are listed on a prescribed stock exchange
(which currently includes the TSX), at the relevant time; and
(b) during the 60-month period immediately preceding the disposition of
the relevant shares, the holder, persons with whom the holder did not
deal at arm's length, or the holder, together with such persons, did
not own (i) 25% or more of the issued shares of any class or series of
shares of the capital stock of New Hemosol or (ii) options or warrants
or other interests in or options in respect of 25% or more of the
issued shares of any class or series of shares of the capital stock of
New Hemosol.
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Labco Class A Shares will be taxable Canadian property to a holder and a
capital gain or capital loss realized on a disposition by the holder of a Labco
Class A Share or on a disposition of a New Hemosol Share which is taxable
Canadian property will be subject to tax under the Tax Act in the manner
described under the heading "-- Holders Resident in Canada -- Capital Gains and
Capital Losses" above, unless the capital gain is exempt from tax under the Tax
Act pursuant to the provisions of an applicable tax treaty or convention. Such
holder of a Labco Class A Share will also be subject to the notification and
withholding provisions of s. 116 of the Tax Act. HOLDERS WHOSE SHARES ARE
TAXABLE CANADIAN PROPERTY SHOULD CONSULT THEIR OWN TAX ADVISORS.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain material U.S. federal income
tax consequences of the Arrangement applicable to the holders of Hemosol Shares
that are US Holders. This summary is for general information only and it does
not constitute a full discussion of all tax considerations potentially relevant
to the Arrangement. This summary does not deal with the state or local income
tax consequences, or the estate and gift tax consequences, of the Arrangement.
ALL US HOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THEIR
PARTICULAR TAX CONSEQUENCES, INCLUDING THEIR ELIGIBILITY FOR ANY APPLICABLE
TREATY BENEFITS, THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS. IN ADDITION, US HOLDERS THAT ARE
PARTNERS IN A PARTNERSHIP THAT HOLDS HEMOSOL SHARES ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS REGARDING THEIR SPECIFIC TAX CONSEQUENCES.
This summary addresses only US Holders that hold Hemosol Shares as capital
assets and use the U.S. dollar as their functional currency. Without limiting
the generality of the foregoing, this summary does not deal with the tax
treatment of investors subject to special rules, such as banks or other
financial institutions, "financial services entities", securities
broker-dealers, traders in securities that elect to use a mark-to-market method
of accounting for their security holdings, insurance companies, tax-exempt
entities, persons that hold Hemosol Shares as part of a hedging, straddle,
conversion or constructive sale transaction or other integrated investment,
persons who received Hemosol Shares or will receive New Hemosol Shares or Labco
Shares as compensation, or certain expatriates or former long-term residents of
the United States.
As used in this section, the term "Labco Shares" means, collectively, the
Labco Class A Shares and the Labco Class B Non-Voting Shares.
This summary is based on the tax laws of the United States, including the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), its
legislative history, existing and proposed regulations thereunder, published
rulings and court decisions, all as currently in effect and all of which are
subject to change at any time, possibly with retroactive effect.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE ARRANGEMENT
In the opinion of Weil, Gotshal & Manges LLP, U.S. counsel to Hemosol, the
various events to be consummated pursuant to the Plan of Arrangement will be
viewed together for purposes of analyzing the potential U.S. federal income tax
consequences of the Arrangement and the Arrangement will likely be viewed as
consisting of three principal related steps. First, Labco should be treated as
transferring an approximately 93% general partner interest in the Blood Products
Partnership to New Hemosol in exchange for all of the New Hemosol Shares.
Second, Labco should be treated as distributing pro rata to its shareholders the
New Hemosol Shares received in step one (the "New Hemosol Shares Distribution").
Finally, MDS should be treated as contributing the Labs Partnership Interest to
Labco in exchange for substantially all of the equity value of Labco.
For U.S. federal income tax purposes, the New Hemosol Shares Distribution
is likely to be treated as a taxable (rather than a tax-free) distribution from
Labco to its shareholders, resulting in a potential U.S. federal income tax
liability to US Holders.
Subject to the passive foreign investment company ("PFIC") rules discussed
below, any distribution by Labco to a US Holder out of earnings and profits, as
determined under U.S. federal income tax principles, will be includible in the
gross income of such US Holder and subject to tax as ordinary dividend income.
In the case of a US Holder that is a corporation, a dividend from Labco will
generally be taxable at regular corporate rates of up to 35% and generally will
not qualify for a dividends-received deduction. In the case of an individual US
Holder (as
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well as in the case of certain trusts and estates), dividends are generally
subject to tax at ordinary income rates of up to 35% as well. Certain "qualified
dividends" received before the taxable year beginning January 2009 are eligible
for a reduced 15% rate of federal income tax; however, it is likely that no
portion of the New Hemosol Shares Distribution would constitute a qualified
dividend. See "-- Dividends" below.
The amount of any distribution in excess of Labco's earnings and profits
will be treated as a tax-free return of capital to the extent of the US Holder's
adjusted basis in its Labco Shares. Any remaining excess distribution will be
treated as gain from the disposition of such US Holder's Labco Shares. Such gain
will generally be capital gain, and will be long-term capital gain if the US
Holder held its Hemosol Shares for more than one year. The maximum rate of U.S.
federal income tax on net long-term capital gains of non-corporate taxpayers,
including individuals, is currently 15%.
Earnings and profits includes both earnings and profits accumulated in
prior years and earnings and profits that are earned during the taxable year in
which the distribution occurs. A distribution out of current earnings and
profits will be treated as a taxable dividend even if the distributing
corporation has a deficit in accumulated earnings and profits. Current earnings
and profits are computed as of the close of the taxable year without diminution
by reason of distributions during such year.
Hemosol believes that it has no accumulated earnings and profits and that
neither Hemosol nor Labco should have current earnings and profits in the
taxable year in which the New Hemosol Shares Distribution will occur -- the
taxable year ending on October 31, 2004. Assuming this to be the case, and
assuming that the PFIC rules do not apply as described below, no portion of the
New Hemosol Shares Distribution would be treated as a dividend. Instead, such
distribution would be treated as a non-taxable return of capital and, to the
extent it exceeded a US Holder's basis in its Labco Shares, as gain from the
sale or exchange thereof. However, no assurance can be given that this will be
the case, since the calculation of earnings and profits is dependent upon future
events and upon the characterization of certain transactions being undertaken in
connection with the Arrangement.
Based upon the characterization of the Plan of Arrangement described
herein, for U.S. tax purposes, a US Holder should have a basis in the New
Hemosol Shares issued pursuant to the Plan of Arrangement equal to the fair
market value of such shares, and the US Holder's holding period for its New
Hemosol Shares should begin on the first day following the date such shares were
issued to the US Holder.
The US Holder's holding period in the Labco Shares will include the holding
period such US Holder had in the Hemosol Shares. The US Holder will have an
aggregate tax basis in its Labco Shares equal to its tax basis in the former
Hemosol Shares, less any amount treated as a return of capital as described
above. The aggregate adjusted tax basis in the Labco Shares should be allocated
between the Labco Class A Shares and the Labco Class B Non-Voting Shares based
on their respective fair market values. Because the issuance of the Labco Class
C Shares should be regarded as transitory, no part of the US Holder's tax basis
in the Hemosol Shares should be allocated thereto.
DIVIDENDS
Subject to the PFIC rules discussed below, any distributions made by New
Hemosol or Labco to a US Holder out of their respective earnings and profits, as
determined under U.S. federal income tax principles, will be includible in the
gross income of such US Holder as ordinary dividend income. Distributions made
by New Hemosol or Labco in excess of their respective earnings and profits will
be treated as a tax-free return of capital to the extent of the US Holder's
respective adjusted basis in such shares, and thereafter as gain from the sale
or exchange of a capital asset. For the other U.S. federal income tax rates and
rules applicable to dividend income, see "-- United States Federal Income Tax
Consequences of the Arrangement" above.
As noted above, certain "qualified dividends" received by a non-corporate
US Holder are eligible for a reduced 15% rate of federal income tax. For this
purpose, qualified dividends generally include dividends paid on shares of
certain non-U.S. corporations, if, among other things, (i) such shares
(including ADRs backed by such shares) are readily tradable on an established
securities market in the United States, or (ii) the non-U.S. corporation is
eligible with respect to substantially all of its income for the benefits of a
comprehensive income tax treaty with the United States which contains an
exchange of information program. The income tax treaty between the United States
and Canada has been identified as a qualifying treaty.
89
Qualified dividends do not include any dividend paid by a non-U.S.
corporation that is treated, or was treated in the prior taxable year, as a
foreign investment company, foreign personal holding company or PFIC. Hemosol
does not believe that it is, or that Labco will be, a foreign investment company
or a foreign personal holding company. While uncertain, Hemosol expects that if
the Arrangement is consummated in 2004, neither Hemosol nor Labco will be
treated as a PFIC in 2004. However, Hemosol believes that it was likely deemed a
PFIC for its taxable years 2001 through 2003, and may also have been deemed to
be a PFIC in preceding years. Following consummation of the Arrangement, the
Labco Shares will no longer be readily tradable on an established securities
market in the United States. Nevertheless, dividends paid by Labco in or after
the taxable year 2005 should be qualified dividends, subject to the applicable
US Holder satisfying the holding period and other requirements described below,
on the basis that Labco should be eligible with respect to substantially all of
its income for the benefits of the income tax treaty between the United States
and Canada. However, dividends paid by Labco in the taxable year 2004, including
any portion of the New Hemosol Shares Distribution treated as a dividend (as
described above), would not be qualified dividends.
However, Hemosol expects that New Hemosol may be a PFIC for 2004. In such
event, any dividends paid to a US Holder by New Hemosol would not be qualified
dividends eligible for the 15% rate of tax.
A US Holder will not be entitled to the preferential 15% rate with respect
to otherwise qualified dividends unless the US Holder has held the Labco Shares
for at least 61 days of the 121-day period beginning on the date which is 60
days before the ex-dividend date and is under no obligation to make related
payments on substantially similar property. Any days during which the US Holder
has diminished its risk of loss on its Labco Shares are not counted towards
meeting the 61-day holding period. Finally, US Holders who elect to treat
qualified dividends as "investment income" pursuant to section 163(d)(4) of the
Internal Revenue Code will not be eligible for the preferential 15% rate of
taxation.
The amount of any distribution paid in Canadian dollars will equal the U.S.
dollar value of the Canadian dollars received calculated by reference to the
exchange rate in effect on the date the dividend is received by the US Holder,
regardless of whether the Canadian dollars are converted into U.S. dollars. If
the Canadian dollars received as a dividend are not converted into U.S. dollars
on the date of receipt, the US Holder will have a basis in the Canadian dollars
equal to their U.S. dollar value on the date of receipt. Any gain or loss
realized on a subsequent conversion or other disposition of the Canadian dollars
will be treated as U.S. source ordinary income or loss.
A US Holder may be entitled to claim a deduction or a foreign tax credit,
in respect of any Canadian tax withheld at source, against its U.S. federal
income tax, subject to applicable limitations in the Internal Revenue Code. A
dividend from Labco or New Hemosol generally will be treated as foreign source
income for purposes of the foreign tax credit limitation. The rules governing
the foreign tax credit are complex, and special rules apply to foreign tax
credits relating to qualified dividends. US HOLDERS ARE ACCORDINGLY URGED TO
CONSULT WITH THEIR TAX ADVISORS REGARDING THE APPLICABILITY OF THE FOREIGN TAX
CREDIT RULES TO THEIR PARTICULAR CIRCUMSTANCES.
GAIN OR LOSS FROM DISPOSITIONS
Subject to the PFIC rules discussed below, a US Holder will generally
recognize taxable gain or loss on the disposition of New Hemosol Shares or Labco
Shares, as the case may be, in an amount equal to the difference between the
amount realized on such disposition and the US Holder's basis in such shares.
Such gain or loss will generally be capital gain or loss. Such gain or loss will
be long-term capital gain or loss if the applicable shares have been held by the
US Holder for more than one year. The maximum rate of U.S. federal income tax
applicable to the net long-term capital gains of non-corporate taxpayers,
including individuals, is currently 15%. Deductibility of capital losses by both
corporate and non-corporate US Holders is subject to limitations.
PASSIVE FOREIGN INVESTMENT COMPANY
Summary
U.S. persons that own shares of a non-U.S. corporation deemed to be a PFIC
are subject to special rules under the Internal Revenue Code. Unless a U.S.
person makes certain elections, such U.S. person will be subject to adverse tax
consequences under the PFIC rules upon sale or other disposition of such shares
or upon the receipt of an "excess distribution" from the PFIC. Hemosol believes
that it was likely deemed a PFIC for its taxable years
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2001 through 2003, and may also have been deemed to be a PFIC in preceding
years. Consequently, it is likely that the New Hemosol Shares Distribution will
constitute an "excess distribution" even if, as currently expected, Labco is not
considered to be a PFIC for the 2004 taxable year in which such distribution is
made. This "excess distribution" will result in adverse tax consequences to US
Holders who failed or fail to make certain elections as described below.
If a US Holder made a valid "QEF Election" or "Mark-to-Market Election" (as
these terms are defined below) with respect to the first year during its holding
period in which Labco (then Hemosol) qualified as a PFIC, the U.S. federal
income tax consequences of the consummation of the Arrangement should not be
affected by the fact that Hemosol is a PFIC. A US Holder who purchased Hemosol
Shares during the taxable year 2003 should still be able to make an effective
QEF Election or Mark-to-Market Election. Moreover, a US Holder who failed to
make a valid QEF Election or Mark-to-Market Election with respect to the first
year during its holding period in which Labco (then Hemosol) qualified as a PFIC
may reduce some of the adverse tax consequences of the New Hemosol Shares
Distribution by making a "Gain Recognition Election" or a "Deemed Sale Election"
(as these terms are defined below) or by making a Mark-to-Market Election with
respect to the taxable year 2003.
Definition of a PFIC; Certain Other Definitions and Special Rules
A non-U.S. company will be treated as a PFIC for any taxable year during
which either (i) 75% or more of its gross income is passive income or (ii) 50%
or more of the average quarterly value of its assets consists of assets that
produce, or are held for the production of, passive income. For this purpose,
passive income generally includes dividends, interest, royalties, rent (other
than rents and royalties derived in the active conduct of a trade or business)
and gains from the sale or exchange of assets that produce passive income. In
determining whether a corporation is a PFIC, it will be treated as owning its
proportionate share of the assets, and as receiving directly its proportionate
share of the income, of any corporation in which it owns, directly or
indirectly, at least 25% of the capital stock by value.
An "excess distribution" is any distribution on the shares of a PFIC during
a given taxable year if, and to the extent that, the amount of such distribution
exceeds 125% of the average amount distributed during the three preceding years
(or, if shorter, the US Holder's holding period in such shares). The amount of
any "excess distribution" or any gain from sale or other disposition of PFIC
shares is allocated rateably over the US Holder's holding period, and the amount
allocated to the current taxable year and any years during which the corporation
was not a PFIC is taxed as ordinary income. The amount allocated to prior
taxable years in which the company was a PFIC is taxed at the highest applicable
marginal rate in effect for such year, and in addition an interest charge is
imposed to recover the deemed benefit from the deferred payment of the tax
attributable to such year.
Dividends paid by a PFIC are not "qualified dividends" as to which the
preferential 15% rate is available. Additionally, a US Holder who inherits
shares of a PFIC is not eligible to claim any basis step-up measured by the fair
market value of such shares on the estate tax valuation date (generally the date
of death). Instead, such US Holder would have a tax basis equal to the
decedent's basis in the PFIC shares, if lower than such fair market value.
Qualified Electing Fund Election
A US Holder may avoid some of the adverse tax consequences of the PFIC
rules described above (other than the ineligibility for the reduced tax rate
applicable to "qualified dividends") by making a qualified electing fund
election ("QEF Election") with respect to the shares of the PFIC, provided that
the QEF Election is in effect for each of the taxable years (i) for which the
applicable non-U.S. corporation is a PFIC and (ii) that includes any portion of
such US Holder's holding period for the shares. A US Holder who has made a QEF
Election is required to include in gross income for each taxable year (i) as
ordinary income, such US Holder's pro rata share of the non-U.S. corporation's
ordinary income for the taxable year, and (ii) as long-term capital gain, such
US Holder's pro rata share of the non-U.S. corporation's net capital gain for
the taxable year. In general, an electing US Holder is to include these amounts
in income regardless of whether it receives any cash distributions from the
non-U.S. corporation. Although an electing U.S. person may further elect to
defer this income recognition until it actually receives a distribution, an
interest charge will be imposed on the tax due when distributions are actually
made (or when the shares are sold or transferred).
91
An electing US Holder's basis in its shares is increased to reflect any
undistributed income that such US Holder recognizes as a result of a QEF
Election. Distributions of income that has previously been subject to tax by
reason of a QEF Election will reduce a US Holder's basis in its shares, but are
not required to be included in income for U.S. federal income tax purposes.
Although a determination as to a corporation's PFIC status is made
annually, once it has been determined that a corporation is a PFIC for a given
taxable year, such determination will generally apply to shares of that
corporation held by U.S. persons during such taxable year and all subsequent
taxable years, whether or not that corporation is a PFIC in such subsequent
years. However, a US Holder who makes the QEF Election for the first year the US
Holder holds or is deemed to hold shares of the applicable corporation for which
such corporation is determined to be a PFIC, is not subject to the PFIC rules
for the years that such corporation is not 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. A US Holder makes
a QEF Election by attaching a completed Form 8621, including the information
provided in the PFIC annual information statement, to its timely filed U.S.
federal income tax return and by filing a copy of the form with the Internal
Revenue Service. Even if a US Holder does not make a QEF Election, if the
applicable company is a PFIC, such US Holder must annually file with its tax
return and with the Internal Revenue Service a completed Form 8621. A copy of
Form 8621 and the related instructions will be available at www.hemosol.com.
US Holders who purchased Hemosol Shares in 2003 should make a QEF Election
by attaching a completed Form 8621, including the information provided in
Hemosol's 2003 PFIC annual information statement, to their timely filed U.S.
federal income tax return for 2003 and by filing a copy of the form with the
Internal Revenue Service. Because Hemosol does not expect to have net ordinary
earnings or capital gain for the taxable year 2003, a QEF Election would not
produce taxable income to an electing US Holder in 2003. Moreover, if, as
expected, Labco is not a PFIC for the taxable year 2004, no amount will be
includible in income as a result of the QEF Election for 2004. In order to
comply with the requirements of a QEF Election, a US Holder must receive certain
information from the non-U.S. corporation. As indicated in its prior filings,
Hemosol agreed to supply requesting US Holders with the information needed to
report income and gain pursuant to the QEF Election in the event it was
classified as a PFIC. US Holders are referred to Hemosol's 2003 PFIC annual
information statement, as required by the PFIC regulations, which will be
available at www.hemosol.com.
US Holders may not make a QEF Election with respect to warrants or rights
to acquire shares, or with respect to shares acquired through the exercise of
warrants or rights. This summary does not address the U.S. federal income tax
consequences of a US Holder holding warrants or rights to acquire shares or of
holding shares acquired through the exercise of such warrants or rights. US
HOLDERS SHOULD CONSULT THEIR TAX ADVISORS CONCERNING THE PFIC CONSEQUENCES OF
HOLDING WARRANTS OR RIGHTS TO ACQUIRE SHARES OR OF HOLDING SHARES ACQUIRED
THROUGH THE EXERCISE OF SUCH WARRANTS OR RIGHTS.
Mark-to-Market Election
A US Holder may avoid some of the adverse consequences of the PFIC rules
described above (other than the ineligibility for the reduced tax rate
applicable to qualified dividends) by making a valid "mark-to-market" election
(the "Mark-to-Market Election"). A US Holder holding shares in a non-U.S.
corporation which is treated as a PFIC could elect to mark the stock to market
annually, recognizing as ordinary income or loss each year an amount equal to
the difference between the US Holder's adjusted tax basis in the applicable
shares and their fair market value. Losses would be allowed only to the extent
of net mark-to-market gain previously included by the US Holder under the
election in previous taxable years. In general, an electing US Holder's basis in
its shares is adjusted to reflect any ordinary income or loss (to the extent
allowed) recognized as a result of a Mark-to-Market Election; a special rule
applies in the case of an electing US Holder who owns shares in a PFIC
constructively through non-U.S. entities. A Mark-to-Market Election cannot be
revoked without the consent of the Internal Revenue Service unless the
underlying shares cease to be marketable.
US Holders who purchased Hemosol Shares in 2003 and elected not to make a
QEF Election may make a Mark-to-Market Election by attaching a completed Form
8621 to their timely filed U.S. federal income tax return for 2003. If, as
expected, Labco is not a PFIC for the taxable year 2004, no amount will be
includible in income as a result of the Mark-to-Market Election for 2004.
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A US Holder who failed to make a valid QEF Election or Mark-to-Market
Election for the first year during his holding period in which Hemosol qualified
as a PFIC may nevertheless purge his Hemosol Shares of their PFIC taint by
making a Mark-to-Market Election for the taxable year 2003. A US Holder who
elects to purge the PFIC taint from its Hemosol Shares by effecting a
Mark-to-Market Election for the taxable year ending December 31, 2003, will be
required to recognize as gain (i) any distribution with respect to its Hemosol
Shares during the taxable year ending December 31, 2003, (ii) any gain from a
disposition of its Hemosol Shares during the taxable year ending December 31,
2003, and (iii) the amount of excess, if any, of the fair market value of its
Hemosol Shares on December 31, 2003 over its adjusted tax basis in such shares.
An electing US Holder will increase its adjusted basis in its Hemosol Shares by
the amount of such excess. All such amounts will be subject to the PFIC rules
that treat such gains as ordinary income and commencing in the taxable year
2004, such US Holder will not be subject to the PFIC rules with respect to its
Labco Shares and hence, the New Hemosol Shares Distribution will not result in
adverse PFIC tax consequences to such electing US Holder.
US HOLDERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO
THEIR SPECIFIC TAX CONSEQUENCES, INCLUDING THEIR ABILITY TO MAKE A
MARK-TO-MARKET ELECTION.
Gain Recognition Election and Deemed Sale Election
Although a determination as to a corporation's PFIC status is made
annually, once it has been determined that a corporation is a PFIC for a given
taxable year, such determination will generally apply to shares of that
corporation held by U.S. persons during such taxable year, for subsequent years,
whether or not that corporation is a PFIC in such subsequent years, unless the
U.S. shareholder has made a valid QEF Election or Mark-to-Market Election. As
noted above, Hemosol believes that it was likely deemed a PFIC with respect to
the taxable years 2001 through 2003, and may also be deemed to be a PFIC in
preceding years. Consequently, unless such elections have been made, it is
likely that the New Hemosol Shares Distribution will constitute an "excess
distribution" even if Labco is not considered to be a PFIC for the 2004 taxable
year.
A US Holder who has failed to make a valid QEF Election or Mark-to-Market
Election for the first year during his holding period in which Hemosol qualified
as a PFIC may nevertheless purge his Hemosol Shares of their PFIC taint by
making a Gain Recognition Election or Deemed Sale Election described herein. If,
as expected, Labco is no longer a PFIC for the 2004 taxable year, US Holders may
purge the PFIC taint by making an election to have their Hemosol Shares deemed
sold, solely for purposes of the PFIC rules, on the last day of the taxable year
in which Hemosol qualified as a PFIC (a "Gain Recognition Election"). Even if
Labco is treated as a PFIC for the 2004 taxable year, US Holders may purge the
PFIC taint by effecting two elections in conjunction: (i) a QEF Election for the
2004 taxable year, and (ii) an election to have the Labco Shares deemed sold,
solely for purposes of the PFIC rules, on the first day of the 2004 taxable year
(the "Deemed Sale Election").
While uncertain, Hemosol expects that if the Arrangement is consummated in
2004, Labco will not qualify as a PFIC in 2004. If Labco is not a PFIC for its
taxable year ending October 31, 2004, a US Holder may make a Gain Recognition
Election (but not a Deemed Sale Election) to have its Hemosol Shares deemed sold
as of December 31, 2003. If Labco is nevertheless a PFIC for its taxable year
ending October 31, 2004, a US Holder may make a Deemed Sale Election (but not a
Gain Recognition Election) to have its Hemosol Shares deemed sold as of January
1, 2004 and to have its Hemosol Shares subject to the rules under the QEF
Election thereafter.
Upon making a Gain Recognition Election, the gain, if any, from the deemed
sale is taxed as an excess distribution. The gain would be equal to the excess,
if any, of the value of Hemosol Shares on December 31, 2003 over the electing US
Holder's basis in such shares. To compute the tax consequences on such gain: (i)
the gain is allocated rateably over the US Holder's holding period, (ii) the
amount allocated to the current taxable year and any prior years during which
Hemosol was not a PFIC is taxed as ordinary income, and (iii) the amount
allocated to any prior taxable years in which Hemosol was a PFIC is taxed at the
highest applicable marginal rate in effect for each year, and an interest charge
is imposed to recover the deemed benefit from the deferred payment of the tax
attributable to each year. A US Holder that recognizes gain from the deemed sale
will increase its adjusted basis in its Labco shares by the amount of gain
recognized. For purposes of determining whether a subsequent sale or disposition
of the shares results in a short or long-term capital gain or loss, the holding
period in the shares includes the period prior to the date of the deemed sale.
Any loss realized on the deemed sale is not recognized.
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Upon making a Deemed Sale Election, the gain, if any, from the deemed sale
is taxed as an excess distribution. The gain would be equal to the excess, if
any, of the value of Hemosol Shares on January 1, 2004 over the electing US
Holder's basis in such shares. The tax consequences of such deemed sale,
including the adjustments to the tax basis and the holding period in such
shares, are as described above with respect to the Gain Recognition Election.
The Gain Recognition Election may be made either (i) with the US Holder's
original return for the tax year that includes the last day of the last year of
Hemosol during which it qualified as a PFIC (which we expect to be the 2003
calendar year); or (ii) by filing an amended return for such tax year. The Gain
Recognition Election is made by attaching either a Form 8621 or a special
statement to the applicable tax return and by paying the required tax and
interest charges. A copy of Form 8621 and the related instructions will be
available at www.hemosol.com.
The Deemed Sale Election is made in the US Holder's return for the taxable
year that includes the deemed sale date. If the US Holder and the PFIC have the
same taxable year, the Deemed Sale Election may be made either (i) with the US
Holder's original return for the tax year that includes the first day of the
first taxable year with respect to which the US Holder made the QEF Election
(which we expect to be the 2004 calendar year); or (ii) by filing an amended
return for such tax year. If the US Holder and the PFIC have different taxable
years, the Deemed Sale Election must be made in an amended return for the
taxable year that included the deemed sale date. The Deemed Sale Election is
made by filing a Form 8621 to the applicable tax return and by paying the
required tax and interest charges.
US HOLDERS WHO HAVE NOT MADE A QEF ELECTION OR A MARK-TO-MARKET ELECTION
WITH RESPECT TO THEIR HEMOSOL SHARES ARE ENCOURAGED TO CONSULT WITH THEIR OWN
TAX ADVISORS WITH RESPECT TO THEIR SPECIFIC TAX CONSEQUENCES, INCLUDING THE TAX
CONSEQUENCES OF MAKING A GAIN RECOGNITION ELECTION OR A DEEMED SALE ELECTION.
Applications of the PFIC Rules to New Hemosol
As New Hemosol will continue to hold, through its interests in the Blood
Products Partnership, substantially all of the assets and operations of Hemosol,
New Hemosol does not expect to earn any revenues from the sale of HEMOLINK until
it introduces HEMOLINK into the U.K. or U.S. markets and subsequently other key
European countries. Accordingly, New Hemosol does not expect that it will have
net ordinary earnings until at least such time, although there can be no
assurance as to this issue. As explained above, a US holder may make a QEF
Election or a Mark-to-Market Election with respect to its New Hemosol Shares.
New Hemosol currently expects that a substantial portion of its gross
income in the 2004 taxable year will consist of interest and other passive
income. It is therefore likely that New Hemosol will be classified as a PFIC for
U.S. federal income tax purposes for the 2004 taxable year. Further, it is
possible that New Hemosol will be classified as a PFIC in subsequent years.
However, New Hemosol anticipates that it would cease to be a PFIC before the
first year in which it expects to have net ordinary income or net capital gain
that would be taxable to US Holders who made a QEF election with respect to
their Hemosol Shares.
US Holders should consider making a QEF Election with respect to their New
Hemosol Shares for the taxable year 2004, whether or not they have made such an
election, or any other election, with respect to their Hemosol Shares or Labco
Shares. Because New Hemosol does not expect to have net ordinary earnings or
capital gain for the taxable year of 2004, a QEF Election would not produce
taxable income to an electing US Holder in 2004. As was true for Hemosol, New
Hemosol will agree to supply requesting US Holders with the information needed
to report income and gain pursuant to the QEF Election in the event it is
classified as a PFIC.
TAX CONSEQUENCES FOR NON-US HOLDERS OF HEMOSOL SHARES, NEW HEMOSOL SHARES AND
LABCO SHARES
Except as described in "Information Reporting and Back-Up Withholding"
below, a person other than a US Holder holding Hemosol Shares, New Hemosol
Shares or Labco Shares will not be subject to U.S. federal income or withholding
tax on the payment of dividends on, and the proceeds from the disposition of,
such shares, unless: (i) such item is effectively connected with the conduct by
such non-US Holder of a trade or business in the United States and, in the case
of a resident of a country that has a treaty with the United States, such item
is attributable to a permanent establishment or, in the case of an individual
under certain treaties, a fixed place of business, in the United States; or (ii)
the non-US Holder is an individual who holds such shares as a capital asset and
is present in the United States for 183 days or more in the taxable year of the
disposition and does not qualify for an exemption.
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INFORMATION REPORTING AND BACK-UP WITHHOLDING
US Holders will generally be subject to information reporting requirements
with respect to dividends paid in the United States on, and on the proceeds from
the sale, exchange or the dispositions of, Hemosol Shares, New Hemosol Shares
and Labco Shares. In addition, US Holders are subject to back-up withholding at
a statutory rate (currently 28%) on dividends paid in the United States on
shares, and on the sale, exchange or other disposition of such shares, unless
the US Holder provides Form W-9 or otherwise establishes an exemption.
Non-US Holders will generally not be subject to information reporting or
back-up withholding with respect to dividends paid on, or the proceeds from the
sale, exchange or other disposition of, Hemosol Shares, New Hemosol Shares and
Labco Shares, provided that such non-US Holder provides a taxpayer
identification number, certifies to its foreign status, or otherwise establishes
an exemption.
Back-up withholding is not an additional tax and the amount of any back-up
withholding will be allowed as a credit against a US or non-US Holder's U.S.
federal income tax liability and may entitle such holder to a refund, provided
that certain required information is furnished to the Internal Revenue Service.
RESIDENTS OF JURISDICTIONS OUTSIDE CANADA AND THE UNITED STATES
THIS CIRCULAR DOES NOT ADDRESS ANY TAX CONSIDERATIONS OF THE ARRANGEMENT
OTHER THAN CANADIAN AND UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS.
SECURITYHOLDERS WHO ARE RESIDENT IN JURISDICTIONS OTHER THAN CANADA AND THE
UNITED STATES SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE TAX
IMPLICATIONS OF THE ARRANGEMENT, INCLUDING ANY ASSOCIATED FILING REQUIREMENTS,
IN SUCH JURISDICTIONS AND WITH RESPECT TO THE TAX IMPLICATIONS OF SUCH
JURISDICTIONS OF OWNING NEW HEMOSOL SHARES AND LABCO CLASS A SHARES AFTER THE
ARRANGEMENT. SECURITYHOLDERS SHOULD ALSO CONSULT THEIR OWN TAX ADVISORS
REGARDING PROVINCIAL OR TERRITORIAL TAX CONSIDERATIONS OF THE ARRANGEMENT OR OF
HOLDING NEW HEMOSOL SHARES AND LABCO CLASS A SHARES.
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RISK FACTORS
The following are certain factors relating to New Hemosol and Labco which
Securityholders should consider in evaluating whether to approve the Arrangement
Resolution. The following information is a summary only of certain risk factors
and is qualified in its entirety by reference to, and must be read in
conjunction with, the detailed information appearing elsewhere in this Circular.
These risks and uncertainties are not the only ones facing New Hemosol and
Labco. Additional risks and uncertainties relating to events or circumstances
which are not currently known to Hemosol, New Hemosol or MDS, or which Hemosol,
New Hemosol or MDS currently considers immaterial, may also impair the
operations of New Hemosol or Labco. If any such events or circumstances actually
occur, the business, financial condition or liquidity and results of operations
of New Hemosol and/or Labco could be materially adversely affected.
RISKS RELATING TO NEW HEMOSOL
The following risk factors are relevant to New Hemosol, the New Hemosol
Shares and the New Hemosol Convertible Securities. Since the principal asset of
New Hemosol will be its 93% partnership interest in the Blood Products
Partnership, the principal risks factors relevant to New Hemosol, the New
Hemosol Shares and the New Hemosol Convertible Securities are those relating to
the Blood Products Partnership. See "Risks Relating to the Blood Products
Partnership" below. As well, since Labco will hold the remaining 7% partnership
interest in the Blood Products Partnership, substantially all of the risks set
out in "Risks Relating to the Blood Products Partnership" below are also
inherent in owning a Labco Share. Since the Blood Products Business prior to the
Arrangement is owned and operated by Hemosol, the risks set out in "Risks
Relating to the Blood Products Partnership" below are substantially the same as
those set out in detail starting on page 25 of Hemosol's Annual Information Form
dated May 27, 2003 incorporated by reference in this Circular and
Securityholders should consider these detailed risk factors in evaluating
whether to approve the Arrangement Resolution.
RISKS RELATING TO THE BLOOD PRODUCTS PARTNERSHIP
GENERAL BUSINESS RISKS
The Blood Products Partnership's ability to continue as a going concern is
dependent upon its ability to secure additional financing.
The Blood Products Partnership's ability to continue as a going concern
will be dependent upon the ability to secure additional financing in order to be
able to continue its product development activities, implement the Cascade at
the Hemolink Building and successfully bring its products to market.
New Hemosol will continue the current activities of Hemosol with respect to
the attraction of strategic investors and relationships with financial
institutions to obtain additional financing in several different forms. However,
the successful conclusion of these transactions cannot be predicted at this
time. Should these efforts be unsuccessful, there will be substantial doubt
about the Blood Products Partnership's ability to continue as a going concern.
The Blood Products Partnership's products are in various stages of development
and have not yet been produced or marketed commercially, making it difficult to
evaluate its business.
Hemosol's operations to date have consisted primarily of developing and
testing its products, and the Blood Products Partnership will have no operating
history upon which to evaluate its business and prospects. To succeed, the Blood
Products Partnership must develop its products on a commercial scale, which will
require, among other things, obtaining appropriate regulatory approvals,
identifying and successfully penetrating key markets for its products and
selling sufficient quantities of its products at the margins necessary to fund
the Blood Products Partnership's continuing operations and growth strategy.
The Blood Products Partnership's failure to retain and attract personnel could
harm its business, operations and product development efforts.
The Blood Products Partnership's products will require sophisticated
management, research and development, marketing and sales, regulatory and
clinical development personnel. The Blood Products Partnership's success will
depend on its ability to attract, train and retain such personnel. The market
for the highly trained personnel that the Blood Products Partnership will
require is very competitive, due to the limited number of people available with
the
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necessary technical skills and understanding of its products and technology. In
addition, Hemosol previously terminated the employment of substantially all its
employees, which will restrict the Blood Products Partnership's activity levels.
In order for the Blood Products Partnership to resume the clinical trials for
HEMOLINK and implement the Cascade at commercial levels at the Hemolink
Building, it will require new employees who may not be available or would be
difficult to replace in the time-frame required or at competitive compensation
rates. If the Blood Products Partnership fails to retain and attract qualified
personnel, its business operations and product development efforts will suffer.
The Blood Products Partnership's intellectual property rights may not provide
meaningful commercial protection for its products. This could enable third
parties to use the Blood Products Partnership's technology, or very similar
technology, and could reduce its ability to compete in the market.
The Blood Products Partnership will be relying on patent, copyright, trade
secret and trademark laws to limit the ability of others to compete with it
using the same or similar technology. However, these laws afford only limited
protection and may not adequately protect the Blood Products Partnership's
rights to the extent necessary to sustain any competitive advantage it may have.
The Blood Products Partnership's patents, or those it licenses, may be
challenged, invalidated or designed around by third parties. The Blood Products
Partnership's patent applications may not issue as patents in a form that will
be advantageous to it, or at all. If the Blood Products Partnership's
intellectual property does not prove to have sufficient protection against
competition, its competitors could compete more directly with the Blood Products
Partnership. Moreover, if the Blood Products Partnership loses any key
personnel, it may not be able to prevent the unauthorized disclosure or use of
the Blood Products Partnership's technical knowledge or other trade secrets by
those former employees despite the existence of nondisclosure and
confidentiality agreements and other contractual restrictions to protect the
Blood Products Partnership's proprietary technology.
The Blood Products Partnership's success will depend partly on its ability to
operate without infringing the proprietary rights of others.
Third parties may claim that the Blood Products Partnership's products
infringe their intellectual property rights. This risk is exacerbated by the
fact that the validity and breadth of medical technology patents involve complex
legal and factual questions for which important legal principles remain
unresolved. The Blood Products Partnership's competitors or others may assert
that its products and the methods it employs may be covered by patents held by
them.
In addition, because patent applications can take many years to issue,
there may be currently pending applications of which the Blood Products
Partnership is unaware, which may later result in issued patents which the Blood
Products Partnership's products infringe. There could also be existing patents
of which the Blood Products Partnership is not aware that its products may
infringe. As the Blood Products Partnership commercializes its hemoglobin-based
oxygen carriers and as competitors commercialize other hemoglobin replacement
products in the future, the possibility of patent infringement claims against
the Blood Products Partnership may increase.
If the Blood Products Partnership loses a patent infringement lawsuit, it
could be required to pay substantial monetary damages. Moreover, the Blood
Products Partnership could be prevented from selling its products unless it can
obtain a licence to use technology or ideas covered by any such patent or are
able to redesign the Blood Products Partnership's products to avoid
infringement. A licence may not be available at all or on terms acceptable to
the Blood Products Partnership, or the Blood Products Partnership may not be
able to redesign the Blood Products Partnership's products to avoid any
infringement. Modification of the Blood Products Partnership's products or
development of new products could require the Blood Products Partnership to
conduct additional clinical trials and to revise its filings with health
regulatory agencies, which could be time-consuming and expensive. The Blood
Products Partnership will be materially harmed if it is unable to successfully
defend any infringement litigation relating to these patents or is unable to
obtain any required licence or sublicence to these patents. In addition, the
costs and time commitments involved in litigation could harm the Blood Products
Partnership's business.
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If the Blood Products Partnership is unable to develop new products to keep pace
with technological developments in the biomedical field, its revenues may be
adversely affected.
The biomedical field, which is the market for the Blood Products
Partnership's products, is characterized by rapid technological change, new and
improved product introductions, changes in regulatory requirements and evolving
industry standards.
Although the Blood Products Partnership is currently developing a new
series of products based on research and development activities conducted to
date, the Blood Products Partnership may not be successful in developing or
introducing to the market these or any other new products or technology. If the
Blood Products Partnership fails to develop and deploy new products on a
successful and timely basis, the Blood Products Partnership may no longer be
competitive and be unable to recoup the research and development and other
expenses incurred to develop and test new products.
The Blood Products Business (as previously operated by Hemosol) has a history of
losses and expects future losses.
Hemosol has had losses from operations for each fiscal year since its
inception. It is expected that the Blood Products Partnership will continue to
incur losses from operations until it is able to commercialize HEMOLINK and/or
products developed under its strategic alliance with ProMetic. While the Blood
Products Partnership will also continue to advance a number of initiatives to
generate revenue in the near term through the provision of bio-manufacturing
services at the Hemolink Building to third parties in the life sciences sector,
it is expected that the Blood Products Partnership's net cash outflows and
operating and net losses will continue for the near term. If the Blood Products
Partnership's products under development are not commercially viable, it may
never achieve profitability. Even if the Blood Products Partnership achieves
profitability, it may not be able to sustain or increase profitability on an
ongoing basis.
The Blood Products Partnership's profitability will be affected if it
experiences product liability claims in excess of its insurance coverage.
The testing and marketing of medical products, even after regulatory
approval, has an inherent risk of product liability. The Blood Products
Partnership maintains product liability insurance coverage in the total amount
of $20 million relating to Phase I, II, and III clinical trials. The Blood
Products Partnership intends to obtain more extensive coverage as the
development of its products progresses. The Blood Products Partnership's
profitability would be adversely affected by a successful product liability
claim in excess of its insurance coverage. The Blood Products Partnership cannot
guarantee that product liability insurance will be available in the future or be
available on reasonable terms.
The hemoglobin the Blood Products Partnership obtains for its products could
contain infectious agents.
Any product derived from human blood, notwithstanding the rigorous testing
procedures now used for the selection of donor blood, can conceivably carry
infectious agents, known or as yet unknown, that were present in the source
blood. In the manufacture of HEMOLINK, the procedure by which the hemoglobin is
purified includes a sequence of validated steps to remove or inactivate viral
and other potentially infectious material. While the Blood Products Partnership
is confident that its process has achieved the highest standard of purity, there
is a theoretical and remote risk that an infectious agent could remain in the
product or resist these stringent procedures. If the red blood cells the Blood
Products Partnership obtains contain infectious agents, it could result in a
loss of, or a delay in, the commercialization of HEMOLINK. Such defects could
cause adverse publicity, damage the Blood Products Partnership's reputation and
impair its ability to market its products. In addition, the Blood Products
Partnership may be subject to significant liability claims.
RISKS ASSOCIATED WITH THE STRATEGIC ALLIANCE WITH PROMETIC
Full implementation of the strategic alliance is subject to the execution of
definitive agreements.
On December 3, 2003, Hemosol and ProMetic executed the ProMetic MOU which
detailed the principal commercial terms of a strategic alliance between the
parties as well as the agreement in principle of the American National Red Cross
for the supply of raw materials to the Blood Products Business and the purchase
from the Blood Products Business of specific therapeutic products isolated using
the Cascade (see "Hemosol Prior to the Arrangement -- Strategic Alliance with
ProMetic"). Pursuant to the ProMetic MOU, Hemosol and ProMetic have
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committed to using their best commercial efforts to negotiate and execute all
definitive agreements necessary to fully implement this strategic alliance.
There is a risk that the parties will be unable to conclude negotiations in a
manner that is mutually agreeable and, as a result, be unable to arrive at terms
for the definitive agreements that are required to fully implement the strategic
alliance with ProMetic.
The execution of the ProMetic MOU also triggered the commencement of
negotiations with the American National Red Cross with respect to setting the
terms of the definitive supply and purchase agreement.
Hemosol and/or the Blood Products Business expects to be in a position to
pursue actual discussions and negotiations with the American National Red Cross
only upon the execution of definitive agreements with ProMetic. No assurance can
be provided that the negotiations with the American National Red Cross will be
pursued by Hemosol and/or the Blood Products Business and, if they are, that
such negotiations will be successful in defining and executing a supply and
purchase agreement between Hemosol and/or the Blood Products Business and the
American National Red Cross or any other agreements required to implement the
terms of the agreement in principle entered into by the American National Red
Cross in connection with the ProMetic MOU.
The Cascade has not been implemented at the commercial scale envisioned by the
ProMetic MOU.
Hemosol (or the Blood Products Partnership) is expected to be the first
licensee of the Cascade and will be the first to attempt to implement the
related technology on a large commercial scale. The principal process and
technology of the Cascade is comprised of a series of discrete steps that have
been optimized and aggregated into a unique sequence. Most of the individual
steps of the Cascade have, on a stand-alone basis, demonstrated the ability to
produce the product yields and purity required to achieve the commercial goals
described in the ProMetic MOU. The ability of the Cascade as a whole, however,
is unproven on a commercial scale. Hemosol has conducted significant scientific
and technical analysis of the Cascade and it is expected that the Blood Products
Partnership can cost-effectively and profitably implement the Cascade on a
commercial scale to successfully achieve the commercial goals described in the
ProMetic MOU. However, there is no assurance that the Blood Products Partnership
will be able to do so.
RISKS ASSOCIATED WITH THE COMMERCIALIZATION OF PRODUCTS DEVELOPED BY THE BLOOD
PRODUCTS PARTNERSHIP
The Blood Products Partnership is dependent on substantial working capital for
the successful commercialization of its products.
The Blood Products Partnership will require substantial working capital to
properly develop, manufacture and sell its products. It is expected that,
following the proactive steps taken in April 2003 to reduce cash burn at
Hemosol, the Blood Products Partnership's cash resources, together with the
proceeds from the Special Warrant Offering and the $16 million cash infusion
provided as part of the Arrangement, will be sufficient to fund its anticipated
operating and capital expenditures through the middle of 2005, after which the
Blood Products Partnership will require additional financing. The Blood Products
Partnership's planned cash requirements may vary materially in response to a
number of factors, including:
(a) the cost of conducting all required non-clinical analysis with the
objective of getting HEMOLINK cleared for further clinical
development;
(b) research and development and clinical trial results generally;
(c) the achievement of key milestones associated with the strategic
alliance with ProMetic;
(d) changes in any aspect of the regulatory process; and
(e) delays in obtaining all requisite regulatory approvals for the Blood
Products Partnership's products and the Hemolink Building.
The Blood Products Partnership's capital-raising efforts could involve the
issuance and sale of New Hemosol Shares and/or the sale of some of the Blood
Products Partnership's assets. The Blood Products Partnership and New Hemosol
may not be able to raise any debt or equity financing if and when it is needed.
If any required financing is not available, the Blood Products Partnership's
ability to continue as a going concern will be in substantial doubt.
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The Blood Products Partnership will have limited manufacturing capabilities and
limited financial resources, which could adversely impact its ability to
commercialize HEMOLINK.
To date, Hemosol has carried out Hemosol's production activities only on
research and pilot scales. In order to commercialize HEMOLINK successfully, the
Blood Products Partnership must be able to manufacture HEMOLINK in commercial
quantities, in compliance with regulatory requirements, at acceptable costs and
in a timely manner. In an effort to significantly shorten the time to profitable
commercialization of HEMOLINK, Hemosol built the Hemolink Building with an
annual capacity of 300,000 units, in anticipation of regulatory approvals. In
light of the recent cessation of clinical trial activity and the refocusing of
the Hemolink Building to seize commercial opportunities presented by the
strategic alliance with ProMetic and by providing bio-manufacturing services,
production of HEMOLINK at a large commercial scale may require the use of third
party manufacturing facilities in addition to the Blood Products Partnership's
own manufacturing facilities. Such facilities may not be available within the
timeline contemplated for the effective commercialization of HEMOLINK or such
facilities as well as the Hemolink Building may require investment by the Blood
Products Partnership to install additional specialized manufacturing equipment
to permit the production of HEMOLINK in parallel with the activities
contemplated under the ProMetic MOU. Any facility will also have to be approved
by regulators in the various jurisdictions in which the Blood Products
Partnership seeks marketing approval for HEMOLINK.
The resumption of clinical trial activity related to the commercialization
of HEMOLINK will be dependent on the outcome of discussions with the relevant
regulatory agencies, the Blood Products Partnership's ability to secure adequate
financial resources and/or the Blood Products Partnership's ability to enter
into a strategic partnership with a third party that will contribute a portion
of the development, regulatory, commercialization and marketing resources and
costs that may be required.
Even if the Blood Products Partnership obtains regulatory approvals to market
HEMOLINK, the Blood Products Partnership will be subject to stringent, ongoing
government regulation and plant inspections, which could cause unexpected delays
in the manufacture, marketing and sale of HEMOLINK.
In order to seek regulatory approval for the marketing and sale of its
products, the Blood Products Partnership will first successfully complete both
pre-clinical studies and clinical trials. These studies and trials must
demonstrate that the products are safe and effective for the clinical use for
which approval is sought. Even if regulatory authorities approve HEMOLINK, its
manufacture, marketing and sale will be subject to ongoing regulation, including
inspection and market surveillance for compliance with Good Manufacturing
Practice regulations in Canada and other jurisdictions. Any enforcement action
resulting from the Blood Products Partnership's failure to comply with these
requirements could adversely affect the manufacture and marketing of HEMOLINK.
In addition, regulatory authorities could withdraw a previously approved product
from the market upon receipt of newly discovered information and/or require
additional, and potentially expensive, studies in areas outside existing
approved indications. Adverse results from, or unanticipated delays in, clinical
trials or failure to receive the appropriate regulatory approvals could
adversely impact the Blood Products Partnership's business. Unanticipated
changes in existing regulations or the adoption of new regulations could
adversely affect the manufacture and marketing of the Blood Products
Partnership's products. Ongoing government regulation and plant inspections
could cause unexpected delays and adversely impact the Blood Products
Partnership's business. Failure to comply with applicable regulatory
requirements may also result in criminal prosecution, civil penalties, recall or
seizure of products, or partial or total suspension of production.
The Blood Products Partnership may not be able to market or distribute HEMOLINK
effectively.
The Blood Products Partnership's success will also depend on its ability to
market and distribute HEMOLINK effectively. However, the Blood Products
Partnership will not have in place the sales force and other distribution
arrangements required to market HEMOLINK effectively, and will have no
experience in commercial sales. In addition, HEMOLINK's commercial success will
depend on its acceptance by the medical community and third-party medical
insurers as clinically useful, cost-effective and safe.
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RISKS ASSOCIATED WITH REGULATORY APPROVAL REQUIREMENTS
Failure to obtain necessary regulatory approvals to commercialize HEMOLINK or
any significant delay in obtaining these approvals would harm the Blood Products
Partnership's business.
On March 13, 2003, based on the recommendation of the DSMB, Hemosol elected
to review safety data prior to continuing enrolment in Hemosol's cardiac trial.
This trial involved the use of HEMOLINK in patients undergoing cardiac bypass
grafting surgery. The DSMB's recommendation was based on an observation of an
imbalance in the incidence of certain adverse events between the HEMOLINK and
control groups reflective of myocardial infarctions. This observation from the
cardiac trial interim data may be due to any number of reasons including
variables in the patient population. As a precaution, Hemosol has also
voluntarily suspended enrolment in its Phase II clinical study involving the use
of HEMOLINK in patients undergoing orthopaedic surgery. In June 2003, Hemosol
completed an internal review which confirmed the observations of the DSMB of an
imbalance of certain adverse events reflective of myocardial infarctions between
the HEMOLINK and control groups and Hemosol elected to terminate the study early
in order to conduct a full safety analysis. That analysis is continuing and the
Blood Products Partnership's objective will be to establish an agreement with
the FDA in the fourth quarter of 2004 for a clinical path for HEMOLINK.
Upon the successful conclusion of all requisite clinical trial activity,
the Blood Products Partnership's ability to ultimately commercialize HEMOLINK is
subject to regulatory approvals. The Blood Products Partnership intends to
market HEMOLINK in the U.S., Europe and other international markets and will
require separate regulatory approval from each jurisdiction. If the Blood
Products Partnership does not receive the appropriate regulatory approvals, it
will not be able to market or sell HEMOLINK, and the Blood Products Partnership
business will be adversely affected. Regulatory authorities also require
separate approval for each additional proposed indication for the use of
HEMOLINK. Hemosol cannot guarantee that the regulatory authorities will approve
HEMOLINK for each indication proposed.
Regulatory approvals are required for therapeutic protein products.
The commercialization of all plasma-based therapeutic protein products
produced using the Cascade will require the receipt of regulatory approvals for
each discrete product. In circumstances where the Blood Products Partnership
will use the Cascade to produce products that are already licensed in a given
market, the requisite approval process should be abridged as compared to the
approval process required for a novel product such as HEMOLINK. Under this
abridged scenario, the Blood Products Partnership, or the party for whom the
Blood Products Partnership will be manufacturing the product under contract,
will be required to undertake clinical trials to demonstrate that the given
product is the "bio-equivalent" (i.e. displays the same or superior key
therapeutic and safety qualities) as the licensed product it seeks to compete
against. Where the Blood Products Partnership seeks to commercialize a novel
product which does not have a licensed equivalent, a full scale clinical trial
and approval process, similar to that for HEMOLINK, will be required. If the
Blood Products Partnership does not receive the appropriate regulatory
approvals, it will not be able to market or sell these products, and the Blood
Products Partnership's business will be adversely affected. Regulatory
authorities also require separate approval for each additional proposed
indication for the use of such products. The Blood Products Partnership will not
be able to guarantee that the regulatory authorities will approve any of the
therapeutic products for the indications proposed.
The Blood Products Partnership may be unable to develop and maintain adequate
sources of (i) hemoglobin to meet demand for HEMOLINK and (ii) plasma to meet
the demand for therapeutic protein products.
Hemoglobin
Although it is expected that the Blood Products Partnership will be able to
purchase sufficient quantities of human red blood cells to support the early
stages of HEMOLINK's commercialization, it will need to develop other sources of
hemoglobin if its source of supply is disrupted or if the market demand for
HEMOLINK is greater than anticipated. The Blood Products Partnership will be
advancing proprietary cell expansion technology for the purpose of developing an
additional or alternative supply of hemoglobin from cells grown outside the
body. However, the Blood Products Partnership's cell expansion technology will
be in the early stages of development.
The Blood Products Partnership will be utilizing a number of other raw
materials and components that are currently provided by sole sourced suppliers.
The Blood Products Partnership will need to identify and qualify
101
alternative backup sources for these components and/or identify other actions to
ensure continuous supply of key materials.
Plasma
The commercial activity contemplated under the ProMetic MOU calls for the
discovery, development and manufacture of therapeutic and non-therapeutic
products derived from human blood plasma. Plasma is one of several key products
that are supplied through the donation of blood at blood collection centres.
Following collection, plasma can be purchased in bulk quantities from a variety
of suppliers, including the American National Red Cross, on a global basis. The
ProMetic MOU includes the agreement in principle of the American National Red
Cross to supply the requisite raw materials to Hemosol (and to the Blood
Products Partnership as the successor to Hemosol's business) and the Blood
Products Partnership will be permitted to source and purchase plasma from the
supplier(s) of its choice on a worldwide basis. As such, it is expected that the
Blood Products Partnership will be able to purchase sufficient quantities of
human plasma to support the commercialization of the products it seeks to
produce with the Cascade. However, the Blood Products Partnership may need to
develop alternative sources of plasma if its primary supplier(s) are unable to
meet the Blood Products Partnership's requirements.
RISKS RELATING TO LABCO
Since Labco will hold limited partnership interests in the Blood Products
Partnership and the Labs Partnership, substantially all of the risks set out in
"-- Risks Relating to the Blood Products Partnership" above and "-- Risks
Relating to the Labs Partnership" below are inherent in owning a Labco Share.
Accordingly, Shareholders should carefully review such sections for details of
the risks relating to the Blood Products Partnership and the Labs Partnership,
as well as the following risk factors.
THE SHARE OWNERSHIP OF LABCO BY MDS MAY ADVERSELY AFFECT THE PRICE OF LABCO
CLASS A SHARES.
Immediately following the Arrangement, MDS will own not less than 47.5% of
the voting securities of Labco in the form of Labco Class A Shares, but will own
99.56% of the equity of Labco through a combination of Labco Class A Shares and
Labco Class B Non-Voting Shares. As a result of its holdings of Labco Class A
Shares, MDS will be in a position to vote its Labco Class A Shares on matters
requiring shareholder approval, including the determination of significant
corporate actions. In addition, the interests of MDS may not correspond with
those of the other holders of Labco Shares. The extent of MDS's share ownership
may limit the price that investors may be willing to pay in the future for Labco
Class A Shares. See "Labco After the Arrangement -- Description of Share
Capital".
THE REQUIREMENT OF CERTAIN CONDITIONS PRECEDENT TO THE ACQUISITION OF LABCO
CLASS A SHARES IN CERTAIN CIRCUMSTANCES MAY DISCOURAGE A TAKE-OVER BID FOR THE
LABCO CLASS A SHARES.
The articles of Labco require that a person or group wishing to acquire a
majority of the Labco Class A Shares comply with certain conditions precedent to
the acquisition of Labco Class A Shares in those circumstances. These
provisions, in effect, require such a person or group to also acquire a
comparable portion of the Labco Class B Non-Voting Shares at fair market value.
Accordingly, these conditions precedent may discourage certain take-over bids
for the Labco Class A Shares. See "Labco After the Arrangement -- Description of
Share Capital".
RESTRICTIONS ON THE BUSINESS AND ACTIVITIES THAT LABCO MAY UNDERTAKE MAY
ADVERSELY AFFECT THE ABILITY OF LABCO TO RESPOND EFFECTIVELY TO FUTURE EVENTS
AND CIRCUMSTANCES.
Labco will be a limited purpose corporation, the articles of which will
contain extensive restrictions on the business and other activities that Labco
may undertake. For example, the articles of Labco will provide that Labco must
retain and may not dispose of its limited partnership interests in the Labs
Partnership or the Blood Products Partnership, except in the circumstances
provided for in the articles, and may not undertake any other business except as
expressly provided in the articles. Further, in addition to any other approvals
required by law, such restrictions may only be modified with the approval by
special resolution of the holders of Labco Class A Shares and Labco Class B
Non-Voting Shares, each voting separately as a class. While restrictions
contained in the articles of Labco are designed to narrow the scope of
activities undertaken by Labco and thereby minimize the risk that Labco will not
be able to distribute Distributable Cash Flow (as defined in "Labco After the
Arrangement" above) to its shareholders, events and circumstances may arise in
the future to which Labco may not be able to effectively
102
respond due to its inability to undertake certain corporate activities. See
"Labco After the Arrangement -- Description of Share Capital".
THE ABSENCE OF A PUBLIC MARKET FOR THE LABCO CLASS A SHARES AND THE LABCO CLASS
B NON-VOTING SHARES MAY ADVERSELY AFFECT THEIR LIQUIDITY.
Neither the Labco Class A Shares nor the Labco Class B Non-Voting Shares
will be listed or posted for trading on any exchange or market and there can be
no assurance that a significant market through which Labco Shares can be sold
will develop or be sustained after the Effective Time. If an active market for
the Labco Shares does not develop, the liquidity of the Labco Shares may be
limited and the market price for Labco Shares may not be readily determinable
and could be subject to significant fluctuations.
THE RESULTS OF LABCO MAY BE ADVERSELY AFFECTED IF CERTAIN LIABILITIES EXISTING
PRIOR TO THE EFFECTIVE TIME ARE NOT FULLY SATISFIED BY THE BLOOD PRODUCTS
PARTNERSHIP.
Prior to the Effective Time, Hemosol carried on an active business, which
included the development and testing of medical products. Under the terms of the
Blood Products Contribution Agreement, the Blood Products Partnership will
expressly assume all liabilities of Hemosol existing prior to the Effective Time
and pursuant to the Labco Indemnity Agreement, the Blood Products Partnership
will agree to indemnify Labco for all such liabilities to the extent that Labco
suffers a loss in respect thereof. However, the Blood Products Partnership may
be unable to fully indemnify Labco in respect of all such losses. Such losses
could be substantial, including but not limited to losses arising as a result of
any act or omission in connection with any clinical, pre-clinical and other
studies and tests conducted by or on behalf of or sponsored by Hemosol or any
Subsidiary or in which Hemosol or any Subsidiary or its products or product
candidates participated prior to the Effective Time. Labco's financial results
and ability to distribute Distributable Cash Flow could be adversely affected in
the event that any such losses are not insured or fully indemnified by the Blood
Products Partnership. See "The Arrangement -- Indemnity Agreements" and "--
Escrow Agreement".
LABCO, AND BY EXTENSION, HOLDERS OF LABCO CLASS A SHARES AND LABCO CLASS B
NON-VOTING SHARES, WILL NOT RECEIVE COMPENSATION IN THE EVENT THAT THE TAX
LOSSES CANNOT BE UTILIZED, IN WHOLE OR IN PART, BY LABCO DUE TO EVENTS OR
CIRCUMSTANCES EXISTING PRIOR TO THE EFFECTIVE TIME.
Under the Arrangement Agreement, Hemosol has represented as to, among other
things, the quantum of the Tax Losses, the stated capital of the Hemosol Shares,
and there not having been prior to the Effective Time an acquisition of control
of Hemosol. In the event that any of such representations is incorrect, the
ability of Labco to apply some or all of the Tax Losses against income will be
restricted, or certain other taxable events may be deemed to have occurred such
that the dividends or other distributions on the Labco Shares will be reduced.
In the event that any such representations are incorrect, holders of Labco
Shares will not be entitled to any compensation in their capacity as Labco
shareholders and, in particular, will not benefit from the MDS Indemnity
Agreement. See "The Arrangement -- Indemnity Agreements".
THE ABILITY OF LABCO TO APPLY THE TAX LOSSES AGAINST INCOME WILL BE COMPROMISED
IN THE EVENT OF AN ACQUISITION OF CONTROL OF LABCO ARISING AFTER THE EFFECTIVE
TIME.
In the event that a person or group, as determined for purposes of the Tax
Act, acquires control of Labco after the Effective Time, the ability of Labco to
apply the Tax Losses against income or to reduce its income tax payable will be
restricted from and after the acquisition of control. There can be no assurance
that an acquisition of control will not occur.
LABCO IS DEPENDENT ON THE ABILITY OF THE LABS PARTNERSHIP AND THE BLOOD PRODUCTS
PARTNERSHIP TO GENERATE INCOME.
Labco will be a limited purpose corporation whose sole assets following the
Arrangement will be its limited partnership interests in the Labs Partnership
and the Blood Products Partnership. Although the articles of Labco will provide
that, subject to applicable law, Labco will distribute Distributable Cash Flow
to holders of Labco Shares, there can be no assurance regarding either the
amount of income to be generated by the Labs Partnership or the Blood Products
Partnership or amounts distributed to Labco. In addition, the declaration of
dividends is at the discretion of the Labco Board. The actual amount distributed
in respect of Labco Shares will depend upon numerous factors, including the
profitability of the Labs Partnership and the Blood Products Partnership,
103
fluctuations in working capital, the sustainability of margins and capital
expenditures, the risks described under "-- Risks Relating to the Labs
Partnership" and "-- Risks Relating to the Blood Products Partnership" and the
ability of Labco to apply the Tax Losses against income.
LABCO WILL BE DEPENDENT UPON THE LABS PARTNERSHIP FOR SUBSTANTIALLY ALL OF ITS
INCOME.
As the Blood Products Partnership (which after the Arrangement will operate
the Blood Products Business) is expected to incur losses from operations until
it is able to commercialize HEMOLINK and/or products developed under its
strategic alliance with ProMetic, Labco will be dependent upon receiving
distributions from the Labs Partnership for substantially all of its income.
Further, the articles of Labco will impose extensive restrictions on the
business that may be carried on by Labco. Accordingly, Labco will be dependent
upon the ability of the Labs Partnership to generate income and, indirectly,
MDS, which will indirectly retain operational control over the Labs Business
through the general partnership interest of MDS Subco.
THERE CAN BE NO ASSURANCE THAT THE TAX ACT OR THE ADMINISTRATIVE PRACTICES OF
CCRA WILL NOT BE CHANGED IN A MANNER THAT ADVERSELY AFFECTS THE ABILITY OF LABCO
TO APPLY THE TAX LOSSES AGAINST INCOME.
There can be no assurance that Canadian federal income tax laws and the
administrative policies and assessing practices of CCRA respecting the ability
of a corporation to apply previously accumulated tax losses against future
income or to reduce tax payable will not be changed in a manner which adversely
affects Labco and, by extension, the holders of Labco Shares.
THE ISSUE OF ADDITIONAL LABCO SHARES AFTER THE EFFECTIVE TIME WILL BE DILUTIVE
TO HOLDERS OF LABCO SHARES.
The articles of Labco will, following completion of the Arrangement,
authorize an unlimited number of Labco Class A Shares and Labco Class B
Non-Voting Shares. While the articles of Labco strictly limit the circumstances
in which Labco Class A Shares may be issued, there are no such restrictions with
respect to the issuance of additional Labco Class B Non-Voting Shares. The
issuance of additional Labco Shares may dilute the holdings of holders of Labco
Shares and reduce the amount of dividends or other distributions per Labco
Share.
US HOLDERS OF HEMOSOL SHARES MAY BE TREATED AS RECEIVING A TAXABLE DISTRIBUTION
FROM LABCO FOR U.S. FEDERAL INCOME TAX PURPOSES.
US Holders are likely to be treated as receiving a taxable distribution of
New Hemosol Shares from Labco for U.S. federal income tax purposes. If Labco is
treated as having earnings and profits for the taxable year ending October 31,
2004, then the fair market value of the deemed distribution will generally be
taxed as ordinary income to the extent of such earnings and profits. There can
be no assurance that for U.S. federal income tax purposes Labco will not be
treated as having earnings and profits for the taxable year ending October 31,
2004.
RISKS RELATING TO THE LABS PARTNERSHIP
THE REVENUES OF THE LABS PARTNERSHIP ARE CAPPED AND DEPENDENT ON GOVERNMENT
HEALTH INSURANCE PROGRAMS.
Revenues from the Labs Business will be substantially dependent on the
Ontario individual corporate caps established for each company providing
applicable services. This funding model prevents a company from increasing its
revenues by increasing its volume of testing. At the same time, however, there
is a risk that a company's corporate cap, and potentially its revenue, may be
decreased if its volume of testing decreases to the extent that it bills less
than its cap in any year. In addition, the current agreement between the MOH and
the OAML, which establishes the individual corporate caps, expires on March 31,
2005. There can be no certainty as to the terms of future agreements between the
MOH and the OAML.
Maintaining or increasing the Labs Partnership's revenues is highly
dependent on the commitment of the Government of Ontario to funding the
laboratory services performed by the Labs Partnership. The healthcare industry
in general is experiencing a trend toward cost containment and management
expects that this trend will continue for the foreseeable future. Revenue
constraint pressures on healthcare funding across Canada will likely continue or
may increase in the future. Any funding reductions or other changes in payment
policies for healthcare services could have a material adverse effect on the
Labs Partnership.
104
GOVERNMENT REGULATION OF THE LABS BUSINESS IS SIGNIFICANT AND LICENCE RENEWALS
ON SATISFACTORY TERMS ARE NOT ASSURED.
Community-based laboratories are subject to significant regulation and
licensing requirements from all levels of government. The licensing and
regulatory requirements relate to, among other matters, the conduct of testing
and reporting results, the handling and disposal of medical specimens and
infectious and hazardous waste and other materials, the safety and health of
employees and the proficiency of staff. Community-based laboratories are also
subject to periodic inspections by regulatory agencies. The licences to operate
a community-based laboratory are granted for a limited term (usually for a term
of one year) and their renewal is subject to government approval. A failure by
the Labs Partnership to comply with laws and regulations could expose it to
significant penalties and may result in civil or criminal sanctions, including
the revocation of licences, certifications and authorizations, the denial of the
right to conduct business and the exclusion from participation in government
healthcare programs. The imposition of any of these sanctions could have a
material adverse effect on the Labs Partnership. Licences are rarely issued and
if a laboratory or clinic operated by the Labs Partnership had its licence
revoked, there is no assurance that it will be issued a new licence.
In addition to existing government healthcare regulations, there are
ongoing initiatives at the federal and provincial levels for comprehensive
reforms to existing legislation and policy governing the provision of healthcare
services, including the payment for and availability of particular services. The
Labs Partnership believes that such initiatives will continue for the
foreseeable future and could increase the cost of compliance for the Labs
Partnership. Certain aspects of these reforms, if adopted, could materially and
adversely affect the Labs Partnership's business, financial condition and
results of operations.
THE SUSTAINED INTERRUPTION OF SERVICES PERFORMED BY THE LABS BUSINESS COULD
ADVERSELY AFFECT RESULTS.
Timely, effective service is essential to maintaining the Labs
Partnership's reputation and revenue stream. The majority of the Labs
Partnership's laboratory services will be performed at its Central Laboratory
which is located in Etobicoke, Ontario. Any sustained interruption of the
services performed at the Central Laboratory which significantly affects the
volume of testing or the accuracy and timeliness in the reporting of test
results could adversely affect the Labs Partnership's business, financial
condition and results of operations.
If the Labs Partnership experiences more equipment malfunctions than
anticipated or if the Labs Partnership is unable to promptly obtain the services
necessary to keep its equipment functioning effectively, its revenues could
decline and its ability to maintain its reputation would be harmed, which could
adversely affect its business, financial condition and results of operations.
THE LABS BUSINESS IS DEPENDENT ON CONTINUED REFERRALS OF PATIENTS.
The success of a community-based laboratory in Ontario is dependent upon
referrals of patients by health care professionals. Referrals are made by
physicians who have no contractual obligation or economic incentive to refer
patients to laboratories operated by the Labs Partnership. The Labs
Partnership's PSCs compete for referrals with its major competitors in the
private sector and with local service providers in the communities in which the
Labs Partnership operates facilities. The Labs Partnership is not dependent on
any single referral source for a material portion of its revenue. However, if a
sufficiently large number of physicians elect at any time to discontinue
referring patients to the Labs Partnership, the Labs Business and its financial
condition and results of operations would be materially adversely affected.
INSURANCE CARRIED BY THE LABS PARTNERSHIP MAY BE INSUFFICIENT TO COVER ALL
RISKS.
Due to the nature of the services provided by the Labs Partnership, general
liability claims may be asserted against the Labs Partnership with respect to
the laboratory services provided to patients, including from reporting
inaccurate results. In that regard, the Labs Partnership may be subject to
errors and omissions claims related to the services it performs and the risks of
medical malpractice by laboratory personnel and pathologists. Although the Labs
Partnership will carry insurance in amounts which are standard in Canada for the
operation of laboratories, there can be no assurance that the Labs Partnership
will have obtained coverage of sufficient scope to satisfy any liability claim.
The Labs Partnership believes that it will be able to obtain adequate insurance
coverage in the future at acceptable costs, but there can be no assurance that
it will be able to do so or that it will not incur significant liabilities in
excess of policy limits. Any such claims that exceed the scope of coverage or
applicable policy limits or
105
an inability to obtain adequate coverage could have a material adverse effect on
the Labs Partnership's business, financial condition and results of operations.
THE INTERRUPTION OF THE LABS PARTNERSHIP'S INFORMATION TECHNOLOGY SYSTEMS COULD
HAVE AN ADVERSE IMPACT ON RESULTS.
The Labs Business will depend, in part, on the continued and uninterrupted
performance of the Labs Partnership's information technology systems. Sustained
system failures or interruptions could disrupt the Labs Partnership's ability to
process laboratory requisitions, perform testing, provide test results in a
timely manner and/or bill the appropriate party. The Labs Partnership's
business, results of operations and financial condition could be adversely
affected by a system failure.
The Labs Partnership's computer systems will be vulnerable to damage from a
variety of sources, including telecommunications failures, malicious human acts
and natural disasters. Moreover, despite network security measures, some of the
Labs Partnership's servers will be potentially vulnerable to physical or
electronic break-ins, computer viruses and similar disruptive problems. Despite
precautions taken by the Labs Partnership, unanticipated problems affecting the
Labs Partnership's systems could cause interruption in its information
technology systems. The Labs Partnership's insurance policies may not adequately
compensate it for any losses that may occur due to any failures in its
information technology systems.
CHANGES IN TECHNOLOGY MAY REQUIRE ADDITIONAL INVESTMENT BY THE LABS PARTNERSHIP
WHICH COULD REQUIRE SUBSTANTIAL INVESTMENT.
The technology used in the laboratory services market is constantly
undergoing development and change. New technologies or new tests may be
developed, or existing technologies or tests refined, which could render the
Labs Partnership's existing equipment technologically or economically obsolete.
The development of new technologies or new applications for existing
technologies may require the Labs Partnership to adapt its existing systems or
acquire new systems in order to successfully compete. Due to cost factors,
competitive considerations or other constraints, there can be no assurance that
the Labs Partnership will be able to acquire or have access to any new or
improved equipment that the Labs Partnership may need in order to serve its
clients and customers. Any inability of the Labs Partnership to provide adequate
technologies may adversely affect the Labs Partnership's business, financial
condition and results of operation.
THE LABS PARTNERSHIP IS RELIANT ON KEY PERSONNEL.
The Labs Partnership's success will largely depend on the skills,
experience and effort of its senior management. The loss of services of one or
more members of the Labs Partnership's key senior management personnel could
significantly weaken the Labs Partnership's management expertise and its ability
to deliver its services efficiently and profitably. In addition, the success of
the Labs Partnership's laboratories depends on employing or contracting, as the
case may be, qualified professionals such as technologists. Currently, there is
a shortage of qualified technologists in Canada. While MDS believes that the
Labs Partnership will be sufficiently staffed to effectively provide services to
patients, the loss of healthcare professionals or the inability to recruit these
individuals in the Labs Partnership's markets could adversely affect the Labs
Partnership's ability to operate its business efficiently and profitably.
106
ANNUAL MEETING AND OTHER SPECIAL BUSINESS
At the Meeting, Shareholders will be asked to elect eight directors of
Hemosol (see "-- Election of Directors" below) and to appoint E&Y as the
auditors of Hemosol (see "-- Appointment of Auditors" below). If the Arrangement
Resolution is approved at the Meeting, pursuant to the Arrangement, New Hemosol
will become the effective successor to the Blood Products Business as it will
hold an approximate 93% general partnership interest in the Blood Products
Partnership, to which Hemosol will transfer the Blood Products Business. See
"New Hemosol After the Arrangement". If this occurs, the directors and auditors
referred to below will become the directors and auditors of New Hemosol. If the
Arrangement Resolution is not approved or the Arrangement is not completed for
any other reason, the directors and auditors referred to below will be the
directors and auditors of Hemosol. Accordingly, it is important that
Shareholders consider carefully the matters referred to below.
ELECTION OF DIRECTORS
The Hemosol Board currently consists of ten directors of which eight will
be standing for re-election. All of the eight nominees for election as directors
currently act as directors of Hemosol.
<Table>
<Caption>
HEMOSOL SHARES
BENEFICIALLY
OWNED, DIRECTLY OR
PERIOD OF INDIRECTLY, CONTROLLED OR
SERVICE AS A DIRECTED AS
NAME AND OFFICE HELD PRESENT PRINCIPAL OCCUPATION DIRECTOR AT MARCH 1, 2004(1)
- -------------------- ---------------------------- ------------ -------------------------
Edward K. Rygiel..................... Executive Chairman, MDS Capital Since 1987 nil(2)
Chairman of the Hemosol Board and Corp. (a health related venture capital firm)
Director and Executive Vice President, MDS Inc. (a
health and life sciences company)
George W. Masters.................... Chairman, Yorkton Biocatalyst Inc. Since 1989 34,786
Vice-Chairman of the Hemosol Board (a venture capital and management services
and Director company)
Lee D. Hartwell...................... President, Chief Executive Officer and Since 2003 5,000
President, Chief Executive Officer, Chief Financial Officer of Hemosol
Chief Financial Officer and Director
Mitchell J. Kostuch.................. President, Kostuch Publications Since 1987 52,694(4)
Director (a publisher of business magazines)
Wilfred G. Lewitt.................... Chairman, MDS Inc. Since 1987 nil(2)
Director
Robert H. Painter.................... Professor Emeritus of Biochemistry Since 1990 10,192
Director and Immunology, Faculty of Medicine,
University of Toronto
C. Robert Valeri..................... Director of Naval Blood Research Since 1992 35,283(3)
Director Laboratory, Professor of Medicine and
Research, Professor of Surgery, Boston
University School of Medicine
Edward E. McCormack.................. Business Advisor and Independent Since 2002 nil
Director Director
</Table>
- ---------------
Notes:
(1) The respective nominees have furnished the information indicated in this
column relating to share ownership.
(2) MDS has a policy which prevents members of management who sit on the boards
of directors of corporations in which MDS holds an interest from holding
any shares in such corporation, unless such shares were acquired prior to
their appointment to such board.
(3) These Hemosol Shares are beneficially owned by Biomedical Innovative
Technology, Inc., a corporation controlled by Dr. Valeri.
(4) These Hemosol Shares are beneficially owned as follows: 31,852 Hemosol
Shares are held by Mr. Kostuch personally and 20,842 Hemosol Shares are
owned by SB Capital Inc., a corporation controlled by Mr. Kostuch.
107
The current Hemosol Board has the following standing committees:
- Audit Committee, the current members of which are Edward McCormack
(Chairman), George W. Masters, Mitchell J. Kostuch and Nelson M. Sims;
- Corporate Governance and Nominating Committee, the current members of
which are Wilfred G. Lewitt (Chairman) and Edward K. Rygiel;
- Human Resources and Compensation Committee, the current members of which
are Edward K. Rygiel (Chairman), George W. Masters and R. Ian Lennox;
- Clinical and Regulatory Committee, the current members of which are
George W. Masters (Chairman), Robert H. Painter and C. Robert Valeri;
- Environmental, Health and Safety Committee, the current members of which
are Mitchell J. Kostuch (Chairman) and Edward McCormack;
- Finance Committee, the current members of which are Wilfred G. Lewitt
(Chairman), Mitchell J. Kostuch and R. Ian Lennox; and
- Marketing Committee, the current members of which are Nelson M. Sims
(Chairman) and R. Ian Lennox.
APPOINTMENT OF AUDITORS
Management proposes to nominate E&Y, Hemosol's present auditors, as
auditors of Hemosol to hold office until the next annual meeting of
Shareholders. The directors negotiate with the auditors of Hemosol on an arm's
length basis in determining the fees to be paid to the auditors. Such fees have
been based upon the complexity of the matters dealt with and the time expended
by the auditors in providing services to Hemosol. Management believes that the
fees negotiated in the past with the auditors of Hemosol have been reasonable
and would be comparable to fees charged by other auditors providing similar
services.
108
EXECUTIVE COMPENSATION
The following table sets forth all annual and long-term compensation earned
during the fiscal year ended December 31, 2003 by Hemosol's chief executive
officer and each of Hemosol's four most highly compensated executive officers,
other than the chief executive officer, who were serving as executive officers
as of December 31, 2003. Such individuals are hereinafter collectively referred
to as the "Named Executive Officers".
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
ANNUAL
COMPENSATION(1) LONG-TERM
---------------- COMPENSATION ALL OTHER
SALARY BONUS SECURITIES UNDER COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) OPTIONS GRANTED(2) ($)
- --------------------------- ---- ------- ------ ------------------ ------------
John Kennedy(5)............................. 2003 101,480 55,000 nil 260,217(8)
President and Chief 2002 267,800 55,000 30,000 18,000
Executive Officer 2001 260,000 65,000 30,000 14,400
Lee D. Hartwell(6).......................... 2003 187,815 20,000 1,383,113 128,400(7)
President, Chief 2002 164,800 20,000 15,000 15,600
Executive Officer and 2001 160,000 32,000 15,000 12,000
Chief Financial Officer
Michael Mathews (3)(4)...................... 2003 201,060 nil 100,000 86,000(7)
Vice President, U.S 2002 201,600 20,000 15,000 15,600
Operations 2001 200,000 16,700 41,250 12,000
Lee Ann Malcolm(4)(9)....................... 2003 150,000 nil nil 85,300(7)
Vice President, 2002 150,000 20,000 15,000 15,600
Marketing 2001 144,711 29,000 15,000 11,770
Dr. David Bell(6)........................... 2003 175,100 20,000 691,556 115,278(7)
Vice President, 2002 175,100 20,000 15,000 15,600
Drug Development and 2001 170,000 34,000 15,000 12,000
Regulatory Affairs
</Table>
- ---------------
Notes:
(1) The value of perquisites and benefits for each Named Executive Officer is
less than the lesser of $50,000 and 10% of total annual salary and bonus.
(2) Hemosol has not issued any stock appreciation rights or made any payouts in
respect of long-term incentive plans.
(3) Michael Mathews was appointed Vice President, U.S. Operations effective
August 7, 2001. On December 11, 2003, the Hemosol Board conditionally
granted 100,000 Hemosol Options to Mr. Mathews. This grant is subject to
Shareholder and regulatory approval -- see "-- Ratification of Conditional
Grants of Options".
(4) Michael Mathews and Lee Ann Malcolm are paid in U.S. dollars. Accordingly,
all amounts shown for Mr. Matthews and Ms. Malcolm are in U.S. dollars.
(5) In May 2003, John Kennedy, Hemosol's then President and Chief Executive
Officer, took a medical leave of absence for an indeterminate period of
time. Mr. Kennedy subsequently passed away on June 4, 2003 and Lee
Hartwell, Hemosol's Chief Financial Officer, was appointed President and
Chief Executive Officer while also maintaining his position as Chief
Financial Officer.
(6) On October 29, 2003, the Hemosol Board conditionally granted 1,383,113
Hemosol Options to Mr. Hartwell and 691,556 Hemosol Options to Dr. Bell.
These grants are subject to Shareholder and regulatory approval -- see "--
Ratification of Conditional Grants of Options".
(7) As part of the efforts undertaken by Hemosol in April 2003 to scale back
operations, reduce cash burn and provide the greatest flexibility, working
notice was provided to substantially all employees and a retention program
was implemented for a core group of senior personnel. Under this retention
program, Mr. Hartwell received a payment of $112,800, Mr. Matthews received
a payment of US$70,400, Ms. Malcolm received a payment of US$69,700, and
Dr. Bell received a payment of $99,678. Each of these named officers also
received an automobile allowance in the amount of $15,600.
(8) Mr. Kennedy received an automobile allowance in the amount of $8,031 and a
death benefit in the amount of $252,186 was paid to Mr. Kennedy's widow.
(9) On April 7, 2003, Hemosol gave Lee Ann Malcolm working notice of
termination of her employment. The notice period for Ms. Malcolm expired on
December 31, 2003.
109
The following table indicates the Hemosol Options granted during the
financial year ended December 31, 2003 to the Named Executive Officers.
<Table>
<Caption>
OPTION GRANTS DURING THE FINANCIAL YEAR ENDED DECEMBER 31, 2003
------------------------------------------------------------------------------------------------
PERCENTAGE OF TOTAL MARKET VALUE OF
HEMOSOL SHARES OPTIONS GRANTED TO HEMOSOL SHARES ON
UNDER OPTIONS EMPLOYEES IN EXERCISE PRICE DATE PRECEDING
NAME GRANTED FINANCIAL YEAR ($/HEMOSOL SHARE) ISSUANCE ($) DATE OF EXPIRY
- ---- -------------- ------------------- ----------------- ----------------- -----------------
John Kennedy......... nil nil nil nil nil
Lee D. Hartwell...... 1,383,113(1) 39.1 0.90 0.80 October 29, 2013
Michael Matthews..... 100,000(1) 2.8 1.60 1.60 December 11, 2013
Lee Ann Malcolm...... nil nil nil nil nil
Dr. David Bell....... 691,556(1) 19.5 0.90 0.80 October 29, 2013
</Table>
- ---------------
Note:
(1) These Hemosol Options were granted as part of a total of 3,541,225 Hemosol
Options granted by the Hemosol Board during the year ended December 31,
2003. These grants remain subject to Shareholder and regulatory approval.
See "Annual Meeting and Other Special Business -- Ratification of
Conditional Grants of Options".
The following table indicates the Hemosol Options exercised during the
financial year ended December 31, 2003 by each of the Named Executive Officers
and the value of Hemosol Options unexercised at year end.
AGGREGATE HEMOSOL OPTIONS EXERCISED DURING THE FINANCIAL
YEAR ENDED DECEMBER 31, 2003 AND FINANCIAL YEAR END OPTION VALUES
<Table>
<Caption>
VALUE OF
UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT AT FINANCIAL
HEMOSOL SHARES FINANCIAL YEAR END: YEAR END(1)($)
ACQUIRED ON AGGREGATE VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE REALIZED ($) UNEXERCISABLE UNEXERCISABLE(2)
- ---- -------------- --------------- ------------------- --------------------
John Kennedy.................. nil nil 237,74,878 nil
Lee D. Hartwell............... nil nil 93,977/1,414,136(3) 0/926,686
Michael Matthews.............. nil nil 34,138/122,113(4) nil
Lee Ann Malcolm............... nil nil 59,217/33,685 nil
Dr. David Bell................ nil nil 81,361/709,001(5) 0/463,342
</Table>
- ---------------
Notes:
(1) Based upon the $1.57 closing price of Hemosol Shares on the TSX on December
31, 2003 (the "Closing Price").
(2) The values cited were calculated by multiplying the difference between the
Closing Price and the exercise price of the in-the-money options by the
total number of in-the-money options held. All in-the-money options were
unexercisable at financial year end.
(3) On October 29, 2003, the Hemosol Board granted 1,383,113 Hemosol Options to
Mr. Hartwell, subject to Shareholder and regulatory approval -- see "--
Ratification of Conditional Grants of Options". Under the terms of the
Arrangement, Mr. Hartwell will be issued a total of 1,383,113 New Hemosol
Options to replace the 1,508,113 Hemosol Options currently held by him.
(4) On December 11, 2003, the Hemosol Board granted 100,000 Hemosol Options to
Mr. Mathews, subject to Shareholder and regulatory approval -- see "--
Ratification of Conditional Grants of Options". Under the terms of the
Arrangement, Mr. Mathews will be issued a total of 100,000 New Hemosol
Options to replace the 156,250 Hemosol Options currently held by him.
(5) On October 29, 2003, the Hemosol Board granted 691,556 Hemosol Options to
Dr. Bell, subject to Shareholder and regulatory approval -- see "--
Ratification of Conditional Grants of Options". Under the terms of the
Arrangement, Dr. Bell will be issued a total of 691,556 New Hemosol Options
to replace the 790,463 Hemosol Options currently held by him.
HUMAN RESOURCES AND COMPENSATION COMMITTEE REPORT
COMPOSITION OF THE HUMAN RESOURCES AND COMPENSATION COMMITTEE
The Human Resources and Compensation Committee (the "Human Resources and
Compensation Committee") of the Hemosol Board during the most recently completed
financial year was comprised of three non-employee directors. Its members were
Edward K. Rygiel (Chairman), George W. Masters and R. Ian Lennox.
110
REPORT ON EXECUTIVE COMPENSATION
The Human Resources and Compensation Committee's responsibilities include
the determination of overall company salary objectives in addition to
determining the compensation of its executive officers. In establishing salary
objectives for executive officers, the Human Resources and Compensation
Committee seeks to accomplish the following goals:
(a) to motivate executives to achieve important corporate and personal
performance objectives and reward them when such objectives are met;
(b) to recruit and subsequently retain highly qualified executive officers
by offering overall compensation which is competitive with that
offered for comparable positions in other biotechnology companies; and
(c) to align the interests of executive officers with the long-term
interests of shareholders through participation in the Hemosol Stock
Option Plan.
Currently, Hemosol's executive compensation package consists of the
following components: base salary, annual incentive bonuses and long-term
incentives in the form of Hemosol Options.
Base salaries for executive officers are determined by evaluating the
responsibilities inherent in the position held and the individual's experience
and past performance, as well as by reference to the competitive marketplace for
management talent at other publicly held, development-stage biotechnology
companies. The Human Resources and Compensation Committee refers to industry,
local and national surveys, prepared for the most part by independent
consultants.
The Hemosol Board approves annual corporate objectives and these, along
with personal performance goals, are used by the Human Resources and
Compensation Committee for the purpose of determining annual incentive bonuses,
giving due consideration to Hemosol's stage of development. At the end of each
year, actual performance against these objectives and goals is measured. The
assessment of whether Hemosol's corporate objectives for the year have been met
includes, but is not limited to, considering the quality and measured progress
of Hemosol's research and development projects, corporate alliances and similar
relationships. The maximum annual bonus for any executive officer other than
Hemosol's chief executive officer has been set at 35% of base salary. Bonus
payments at this level would reflect extraordinary personal achievement and
Hemosol's attainment of all corporate objectives for the year under review.
A portion of executive compensation is aligned with growth in share value.
Hemosol Options are awarded to executive officers at the commencement of
employment and annually on meeting individual objectives. Hemosol Options are
granted to reward individuals for current performance, expected future
performance and value to Hemosol.
The principles described above apply to the determination of the
compensation of all executive officers, including Hemosol's chief executive
officer. The Human Resources and Compensation Committee acts alone when
considering the compensation of Hemosol's chief executive officer; however, the
chief executive officer assists the Human Resources and Compensation Committee
in assessing the performance of all other executive officers.
The Human Resources and Compensation Committee reports and makes
recommendations to the Hemosol Board with respect to compensation.
Presented by the Human Resources and Compensation Committee:
Edward K. Rygiel
George W. Masters
R. Ian Lennox
111
PERFORMANCE GRAPH
The following graph compares Hemosol's total shareholder return since
December 31, 1998 to December 31, 2003 against the return on the TSX
Biotechnology and Pharmaceuticals Index for the same period(1).
(PERFORMANCE GRAPH)
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------
31-DEC-98 31-DEC-99 29-DEC-00(2) 31-DEC-01 31-DEC-02 31-DEC-03
- -----------------------------------------------------------------------------------------------------
HEMOSOL INC. 100 261 180 56 28 75
TSX BIOTECH INDEX 100 127 105 115 57 98
</Table>
Notes:
(1) Hemosol has paid no dividends to date on the Hemosol Shares. The TSX
Biotech and Pharmaceuticals Index is the total index return, including
dividends reinvested.
(2) The last trading day of 2000 was December 29.
DIRECTORS' COMPENSATION
Directors generally are compensated for their services through a
combination of retainer fees and meeting attendance fees. Directors receive an
annual retainer fee of $10,000 and an attendance fee of $750 for each meeting
attended. In addition, committee members are paid $2,000 per annum as
compensation for services rendered to the committees on which they serve
(collectively, the "Directors' Compensation"). Any member of the Hemosol Board
who is also an executive officer of Hemosol does not receive compensation as a
director of Hemosol. During the year ended December 31, 2003, Directors'
Compensation with an aggregate value of $242,591 was paid. Directors are
reimbursed for expenses incurred to attend meetings of the Hemosol Board and
committees. As members of Hemosol's scientific advisory board, Messrs. Robert H.
Painter and C. Robert Valeri each received $1,000 per month from Hemosol in
connection with their work as members of the scientific advisory board.
Historically, each director was awarded 5,000 Hemosol Options upon joining the
Hemosol Board and all directors were awarded an additional 5,000 options in
2000. Each of Messrs. Nelson M. Sims and Edward E. McCormack was awarded 10,000
Hemosol Options upon joining the Hemosol Board. Mr. Nelson M. Sims joined in May
2001 and Mr. Edward E. McCormack joined in December 2002. For the year ended
December 31, 2003, 6,000 Hemosol Options were awarded to each of Messrs. George
W. Masters, Mitchell J. Kostuch, Edward McCormack, Robert H. Painter and C.
Robert Valeri as partial compensation for their efforts as independent and
unrelated directors. These Hemosol Options were part of a larger pool of 775,000
Hemosol Options granted subject to Shareholder and regulatory approval. Future
Hemosol Options grants to the directors will be reviewed in the context of
overall corporate performance.
Commencing with the second quarter of 2003, the directors agreed
unanimously to defer the payment of all Directors' Compensation until Hemosol's
financial condition had stabilized. Accordingly, all Directors' Compensation
related to activities beginning on April 1, 2003 was accrued by Hemosol and paid
in full in February 2004.
INTEREST OF INSIDERS IN MATERIAL TRANSACTIONS
MDS is an insider of Hemosol by virtue of its ownership of more than 10% of
the Hemosol Shares, as described above under "General Proxy Matters -- Voting
Securities and Principal Holders Thereof".
112
CORPORATE GOVERNANCE
In February 1995, the TSX approved a report of its committee on corporate
governance, including a recommendation that companies incorporated in Canada and
listed on the TSX be obligated to respond to the fourteen guidelines set out in
the report. The Hemosol Board has reviewed these guidelines and believes that
its corporate governance practices continue to be generally consistent with
those set out in the report of the TSX's committee on corporate governance.
Details of Hemosol's corporate governance practices and the
responsibilities of the Hemosol Board as well as the practices to be adopted by
the board of directors of New Hemosol, with reference to the report's
guidelines, are addressed below. In this section, reference to the "Hemosol
Board" shall include reference to the board of directors of New Hemosol and
reference to "Hemosol" shall include reference to New Hemosol as well as the
Blood Products Partnership.
<Table>
<Caption>
GUIDELINE HEMOSOL'S PRACTICE
--------- ------------------
1. The Hemosol Board should explicitly
assume responsibility for stewardship of the
corporation, and specifically:
(i) adopt a strategic planning process, A strategic planning process is in effect and
at least one board meeting each year is set
aside to review strategic planning.
Additionally, strategic issues are reviewed
from time to time by the Hemosol Board.
(ii) identify principal risks of the The principal risks to Hemosol's business are
business and implement systems of identified in the 2002 Annual Information Form
risk management, filed by Hemosol under the heading "Narrative
Description of the Business -- Risk Factors".
Senior management actively addresses these
risks, and the Hemosol Board, at its regular
meetings, receives and reviews reports from
management on its assessment and management of
these risks.
(iii) provide for succession planning, The CEO has, pursuant to the Hemosol Board's
including appointing, training and instruction, developed a succession plan for
monitoring senior management, senior management which has been approved by
the Hemosol Board. Succession planning with
respect to senior management is a continuing
responsibility of the CEO, involving
participation by the Human Resources and
Compensation Committee of the Hemosol Board.
Senior management is responsible for the
evaluation and succession planning of
positions reporting to them.
(iv) communications policy, The public disclosure of Hemosol is designed
such that required, effective and timely
communication about its business is made
available to shareholders, members of the
public and media. Hemosol routinely obtains
expert external advice to assist in effective
and proper disclosure.
(v) the integrity of Hemosol's internal Senior management has the primary
control and management information responsibility for Hemosol's internal controls
systems. and management information systems. Through
the Audit Committee of the Hemosol Board,
which meets with Hemosol's external auditors,
the Hemosol Board assesses the strength of
these controls.
</Table>
113
<Table>
<Caption>
GUIDELINE HEMOSOL'S PRACTICE
--------- ------------------
2. The Hemosol Board should be constituted For the purpose of the report, an unrelated
with a majority of individuals who qualify as director is one who is independent of
unrelated directors. management and free from any interest and any
business or other relationship which could, or
could reasonably be perceived to, materially
interfere with the director's ability to act
in the best interests of the corporation,
other than interests or relationships arising
from shareholding.
The board of directors of New Hemosol will
initially consist of eight directors.
Excluding the CEO, the remaining seven
directors will be unrelated within the meaning
of the report, and accordingly, the board of
directors of New Hemosol will be constituted
with a majority of unrelated directors.
3. In the case of a corporation with a The report defines a significant shareholder
significant shareholder, disclose whether the as "a shareholder with the ability to exercise
Hemosol Board is constituted with the a majority of the votes for the election of
appropriate number of directors which are not the board of directors". Hemosol does not have
related to either the corporation or the a significant shareholder. For the year ended
significant shareholder. December 31, 2003, four of the ten directors
were employed by MDS which holds approximately
11.7% of the outstanding Hemosol Shares. Two
of New Hemosol's directors will be employed
by, or representatives of, MDS.
4. Appoint a committee of directors composed Hemosol's Corporate Governance and Nominating
exclusively of outside, i.e. non-management Committee (see description of Corporate
directors, a majority of whom are unrelated Governance and Nominating Committee under
directors, responsible for the appointment and guideline number nine) is responsible for
assessment of directors. nominating individuals for consideration by
the Hemosol Board as directors. This committee
does not have formal responsibility for the
assessment of individual directors following
their appointment to the Hemosol Board.
5. Implement a process for assessing the See description of Corporate Governance and
effectiveness of the Hemosol Board, its Nominating Committee under guideline number
committees and individual directors. nine.
6. Provide an orientation and education Hemosol does not have a formal orientation and
program for new directors. education program for new directors. However,
all of the current directors have been members
of the Hemosol Board for several years and are
well versed in the business of Hemosol.
7. Examine the size of the Hemosol Board, The Hemosol Board presently consists of ten
with specific reference to its effectiveness. members with varying business and scientific
backgrounds, suitable to Hemosol's interests,
of which only eight will be standing for
re-election at the Meeting. Upon completion of
the Plan of Arrangement, the newly elected
directors of Hemosol will become the directors
of New Hemosol.
8. Review compensation of directors in light The Human Resources and Compensation Committee
of risks and responsibilities. has a mandate to review and recommend to the
Hemosol Board directors' remuneration.
Remuneration was first paid to Hemosol's
directors in 1994, based on several factors,
including time
</Table>
114
<Table>
<Caption>
GUIDELINE HEMOSOL'S PRACTICE
--------- ------------------
commitments and emoluments to directors of
similar organizations.
9. Committees should generally be composed Hemosol has seven standing committees, as
of only outside directors, a majority of whom follows:
are unrelated directors.
The Audit Committee is composed of unrelated
directors. Its mandate is to review the
financial statements, including the format and
content of the statements before submission to
the Hemosol Board, to review the adequacy of
Hemosol's internal control procedures, and to
approve the external audit program and assess
the results thereof with management and the
auditors. In fulfilling its mandate, in
addition to meeting jointly with management
and the auditors, the committee meets
independently with the auditors.
The Human Resources and Compensation Committee
is composed of unrelated directors. It reviews
Hemosol's overall compensation program and
corporate succession plans at the senior
management level. It has responsibility for
reviewing and recommending to the Hemosol
Board, for its approval, the compensation
programs for both senior management and
directors. Its mandate also includes reviewing
management compensation policies and benefits
and reviewing the overall quality of Hemosol's
human resources program.
The Corporate Governance and Nominating
Committee is composed of unrelated directors.
Its mandate is to recommend effective
governance systems for Hemosol and to advise
the Hemosol Board on the application of
existing corporate governance principles, to
assess the effectiveness of the Hemosol Board
and to assess, review and recommend nominees
for directorships. It is also responsible for
administering the Hemosol Board's relationship
with management and acting as a forum for
governance issues and related concerns of any
director.
The Finance Committee is composed of unrelated
directors. Its mandate is to review all
proposed financing arrangements and to provide
recommendations to the Hemosol Board on all
material financial matters relating to
Hemosol.
The Marketing Committee is comprised of
unrelated directors. Its mandate is to ensure
that Hemosol's marketing effort is
appropriately directed and resourced for
success in a competitive market. The marketing
committee assumes responsibility for reviewing
and approving: the annual marketing plan;
ongoing plan adjustments (if required); the
marketing management succession plan; and the
marketing resource allocation (people and
budget).
</Table>
115
<Table>
<Caption>
GUIDELINE HEMOSOL'S PRACTICE
--------- ------------------
The Research and Regulatory Committee is
composed of unrelated directors. It is
responsible for oversight, at the board level,
of Hemosol's research programs. It assists
Hemosol in monitoring appropriate processes
for the review and approval of the clinical
development program.
It also reports any concerns or issues
relating to either Hemosol's research or
clinical development programs to the Hemosol
Board.
The Environmental Health and Safety Committee
is composed of unrelated directors. Its
mandate is to monitor the written
environmental policy of Hemosol and to oversee
the environmental protection program which
addresses issues such as compliance with
environmental laws and regular reporting
procedures. Its mandate also includes a
reporting procedure whereby any environmental
concerns, including spills and discharges, are
brought to the attention of the Hemosol Board.
In addition to its formal committees, the
Hemosol Board also strikes committees on an ad
hoc basis to address specific requirements and
Hemosol also assigns responsibility to
individual Hemosol Board members to act as
liaison, between the Hemosol Board as a whole
and management, in specific areas, including
ethics.
10. Assume or assign responsibility for See description of the Corporate Governance
corporate governance issues. and Nominating Committee under guideline
number nine.
11. Define management's responsibilities and The Hemosol Board has the ultimate
approve corporate objectives to be met by the responsibility for supervising the management
CEO. of Hemosol. Management brings to the attention
of the Hemosol Board for discussion and
direction all matters which are outside the
day-to-day operations of Hemosol, or which
would represent a material deviation from
Hemosol's business plan or budget. The
business plan and budget are both approved by
the Hemosol Board. Additionally, the annual
objectives of the CEO are reviewed and
approved by the Hemosol Board.
12. Establish structures and procedures to For several years, the office of Chairman of
enable the Hemosol Board to function the Hemosol Board has been separated from that
independently of management. An appropriate of the CEO and has been filled by a person who
structure would be to appoint a chairman who is not a member of management.
is not a member of management.
13. The audit committee should be composed of See description of the Audit Committee under
outside directors and its role specifically guideline number nine.
defined.
14. Implement a system to enable individual In concert with their overall duties and
directors to engage outside advisors, at obligations as directors, individual directors
Hemosol's expense. may engage outside advisers, at Hemosol's
expense, subject to approval by the Human
Resources and Compensation Committee.
</Table>
116
DIRECTORS' AND OFFICERS' INSURANCE
Hemosol maintains liability insurance for its directors and officers. An
aggregate annual premium of approximately $630,720 was paid by Hemosol for such
insurance in 2003 and no part of the premium was paid by the directors or
officers of Hemosol. The aggregate insurance coverage under the policy is
limited to $10 million per year. Hemosol is liable to reimburse the insurer
$250,000 for each claim made under the policy.
RATIFICATION OF CONDITIONAL GRANTS OF OPTIONS
At the Meeting, Shareholders will also be asked to consider and, if deemed
advisable, approve a resolution described below relating to an amendment to the
Hemosol Stock Option Plan in order to ratify the conditional grant of 2,766,225
Hemosol Options on October 29, 2003 and 775,000 Hemosol Options on December 11,
2003 under the Hemosol Stock Option Plan.
During 2003, Hemosol considered various compensation arrangements to ensure
the retention of key personnel in light of its financial resources and the
challenges that it faced and the Hemosol Board conditionally granted options
with exercise prices of $0.09 and $1.60 per Hemosol Share under the Hemosol
Stock Option Plan as part of such retention arrangements as most of the existing
Hemosol Options at such time had exercise prices that were significantly higher
and were out-of-the-money. As part of the Arrangement, subject to Shareholder
ratification and the consent of the relevant holder, such conditional options
will replace, in effect, such existing options.
On October 29, 2003, the Hemosol Board conditionally approved the grant of
an aggregate of 2,766,225 Hemosol Options to Lee Hartwell, Hemosol's President,
Chief Executive Officer and Chief Financial Officer, Dirk Alkema, Hemosol's Vice
President, Operations and David Bell, Hemosol's Vice President, Discovery, which
options (a) may be exercised to purchase Hemosol Shares at an exercise price of
$0.90 per share, (b) will fully vest on October 29, 2004 and (c) will otherwise
be subject to the terms and conditions of the Hemosol Stock Option Plan. In
addition, on December 11, 2003, the Hemosol Board conditionally approved the
grant of an aggregate of up to 775,000 Hemosol Options, of which an aggregate of
144,000 Hemosol Options were granted to Hemosol's directors and the remaining
approximately 631,000 Hemosol Options were granted to Hemosol's employees and
service providers. All of the 775,000 Hemosol Options may be exercised to
purchase Hemosol Shares at an exercise price of $1.60 per share and will be
subject to the terms and conditions of the Hemosol Stock Option Plan. All of
these Hemosol Options were conditionally approved subject to approval of the
Hemosol Stock Option Plan Amendment by the Shareholders and regulatory approval.
The conditional Hemosol Options described above form part of the Specified
Hemosol Options and will be dealt with under the Arrangement as described under
"The Arrangement -- Treatment of Hemosol Options in Connection with the
Arrangement". In connection with the Arrangement, the holders of such
conditional Hemosol Options will be asked to consent to the replacement of all
of their Hemosol Options (including the conditional Hemosol Options) with New
Hemosol Options to replace only the conditional Hemosol Options. If they do not
so consent, such holders will receive New Hemosol Options to replace only their
Hemosol Options that are not part of the conditional Hemosol Options. Assuming
the relevant consents are obtained, it is expected that a total of approximately
4,000,000 New Hemosol Options will be issued to replace the approximately
5,000,000 outstanding Hemosol Options granted pursuant to the Hemosol Stock
Option Plan (including the conditional Hemosol Options).
The grant of the conditional Hemosol Options described above require the
ratification of the Shareholders as such grants resulted in the number of
Hemosol Shares reserved for issuance under the Hemosol Stock Option Plan being
in excess of the maximum number allowable thereunder at the relevant times.
At the Meeting, the Shareholders will be asked to consider and, if deemed
advisable, to approve the following resolution to approve the Hemosol Stock
Option Plan Amendment in order to ratify the conditional grant of 2,766,225
Hemosol Options on October 29, 2003 and 775,000 Hemosol Options on December 11,
2003:
"BE IT RESOLVED as an ordinary resolution of the Shareholders of Hemosol
that, subject to regulatory approval, the Hemosol Stock Option Plan
Amendment, as more particularly described in the Management Information
Circular dated March 10, 2004, be and the same is hereby approved."
In order for the foregoing resolution to be passed, it must be approved by
a simple majority of the votes cast by Shareholders voting, in person or by
proxy, at the Meeting. The persons named in the enclosed form of proxy, if named
as proxy, intend to vote for the approval of the Hemosol Stock Option Plan
Amendment.
117
APPROVAL OF NEW HEMOSOL STOCK OPTION PLAN
At the Meeting, Shareholders will be asked to consider and, if deemed
advisable, approve the adoption by New Hemosol of the New Hemosol Stock Option
Plan which will authorize the New Hemosol Board to issue stock options to
directors, officers, employees or other service providers of New Hemosol and its
subsidiaries or affiliated entities, including the Blood Products Partnership.
The New Hemosol Stock Option Plan is described under "New Hemosol After the
Arrangement -- New Hemosol Stock Option Plan" in this Circular, and a copy
thereof is set out in Annex F to this Circular.
At the Meeting, the Shareholders will be asked to consider and, if deemed
advisable, to approve the following resolution to approve the adoption of the
New Hemosol Stock Option Plan:
"BE IT RESOLVED, as of the Effective Date, as an ordinary resolution of the
Shareholders of New Hemosol that subject to regulatory approval, the New
Hemosol Stock Option Plan, as more particularly described in the Management
Information Circular dated March 10, 2004, be and the same is hereby
approved."
In order for the foregoing resolution to be passed, it must be approved by
a simple majority of the votes cast by Shareholders voting, in person or by
proxy, at the Meeting. The persons named in the enclosed form of proxy, if named
as proxy, intend to vote for the approval of the adoption of the New Hemosol
Stock Option Plan.
APPROVAL OF AMENDED AND RESTATED LABCO BY-LAWS
At the Meeting, Shareholders will be asked to consider and, if deemed
advisable, approve the adoption by Labco of the Amended and Restated Labco
By-Laws as set out in Annex M to this Circular.
At the Meeting, the Shareholders will be asked to consider and, if deemed
advisable, to approve the following resolution to approve the Amended and
Restated Labco By-Laws:
"BE IT RESOLVED, as of the Effective Date, as an ordinary resolution of the
Shareholders of Hemosol that the Amended and Restated Labco By-Laws, as
more particularly described in the Management Information Circular dated
March 10, 2004, be and the same is hereby approved."
In order for the foregoing resolution to be passed, it must be approved by
a simple majority of the votes cast by Shareholders voting, in person or by
proxy, at the Meeting. The persons named in the enclosed form of proxy, if named
as proxy, intend to vote for the approval of the Amended and Restated Labco
By-Laws.
118
GENERAL PROXY MATTERS
PURPOSE OF THE MEETING
The purpose of the Meeting is that Securityholders consider and, if deemed
advisable, pass, with or without variation, the Arrangement Resolution to
approve the Arrangement under section 182 of the OBCA, and that Shareholders (i)
receive and consider the annual financial statements of Hemosol and the report
of the directors and auditors thereon, (ii) elect the directors of Hemosol,
(iii) appoint the auditors of Hemosol and authorize the directors to fix their
remuneration, (iv) consider and, if deemed advisable, pass, with or without
variation, a resolution approving the Hemosol Stock Option Plan Amendment, (v)
if the Arrangement Resolution is passed, consider and, if deemed advisable,
pass, with or without variation, a resolution approving the New Hemosol Stock
Option Plan and (vi) if the Arrangement Resolution is passed, consider and, if
deemed advisable, pass, with or without variation, a resolution approving the
Amended and Restated Labco By-Laws.
DATE, TIME AND PLACE OF MEETING
The Meeting will be held on Tuesday, the 20th day of April, 2004 commencing
at 10:00 a.m. (Toronto time) at the TSX Broadcast Centre, Gallery Room, 130 King
Street West, Toronto, Ontario.
SOLICITATION OF PROXIES
THIS CIRCULAR IS FURNISHED IN CONNECTION WITH THE SOLICITATION OF PROXIES
BY THE MANAGEMENT OF HEMOSOL FOR USE AT THE MEETING FOR THE PURPOSES SET FORTH
IN THE ACCOMPANYING NOTICE OF MEETING. Securityholders are requested to execute
and return the appropriate form of proxy in the envelope provided for that
purpose. Shareholders are asked to complete and deliver the form of proxy
printed on blue paper. Eligible Convertible Securityholders are asked to
complete and deliver the form of proxy printed on green paper. Persons holding
both Hemosol Shares and Eligible Convertible Securities are requested to
complete and deliver both the blue and green forms of proxy.
To be effective, proxies must be validly executed (if a Securityholder is
not an individual, it must have the proxy executed by a duly authorized officer
or properly appointed attorney) and received either by mail or delivery
addressed to Computershare Trust Company of Canada, at 100 University Avenue,
9th Floor, Toronto, Ontario M5J 2Y1 or to the Secretary of Hemosol at the
offices of Hemosol at 2585 Meadowpine Blvd., Mississauga, Ontario L5N 8H9 or by
facsimile to Computershare toll-free at 1-866-249-7775 (or in the Toronto area
at (416) 263-9524), in each case before 5:00 p.m. (Toronto time) on April 16,
2004 or, if the Meeting is adjourned or postponed, 48 hours (excluding
Saturdays, Sundays and holidays) before the time the adjourned Meeting is
reconvened or the postponed Meeting is convened. Proxies may also be deposited
with the scrutineers of the Meeting, to the attention of the chair of the
Meeting, at or immediately prior to the commencement of the Meeting or any
postponement(s) or adjournment(s) thereof. An undated but executed proxy will be
deemed to be dated as of the date of this Circular.
It is expected that the solicitation of proxies will be primarily by mail,
but proxies may also be solicited personally by regular employees of Hemosol for
which no additional compensation will be paid. The cost of preparing, assembling
and mailing this Circular, the Notice of Meeting, the form of proxy and any
other material relating to the Meeting has been or will be borne by Hemosol,
subject to reimbursement by MDS of certain fees and expenses, as discussed in
detail in "The Arrangement -- Expenses of the Arrangement". Hemosol will
reimburse brokers and other entities for costs incurred by them in mailing
soliciting materials to the beneficial owners of Hemosol Securities.
APPOINTMENT OF PROXYHOLDER
The persons named in the accompanying form of proxy are representatives of
management of Hemosol and are directors or officers of Hemosol. A Securityholder
has the right to appoint a person (who need not be a Securityholder) to
represent the Securityholder at the Meeting other than the persons designated in
the accompanying form of proxy. Such right may be exercised by inserting the
name of such person in the blank space provided in the form of proxy.
119
NON-REGISTERED HOLDERS
Only registered Securityholders or the persons they appoint as their
proxyholders are permitted to vote at the Meeting. A person who beneficially
owns Hemosol Securities through an intermediary such as a bank, trust company,
securities dealer, broker, trustee or administrator (an "Intermediary") is not a
registered Securityholder (a "Non-Registered Holder").
In accordance with applicable securities laws, Hemosol is distributing
copies of the Meeting Materials to clearing agencies and Intermediaries for
onward distribution to Non-Registered Holders. Intermediaries are required to
forward Meeting Materials to Non-Registered Holders unless a Non-Registered
Holder has waived the right to receive them. Generally, Non-Registered Holders
who have not waived the right to receive Meeting Materials will either:
(a) be sent by the Intermediary a pre-signed form of proxy for the number
of Hemosol Securities beneficially owned by the Non-Registered Holder,
which must be completed by the Non-Registered Holder; or
(b) receive a request for voting instruction form which must be completed
and signed by the Non-Registered Holder.
The purpose of these procedures is to permit Non-Registered Holders to
direct the voting of the Hemosol Securities they beneficially own. Every
Intermediary has its own mailing procedures and provides its own signing and
return instructions. Non-Registered Holders should carefully follow the
instructions of their Intermediaries to ensure that their Hemosol Securities are
voted at the Meeting.
Should a Non-Registered Holder who receives either a proxy or a voting
instruction form from its Intermediary wish to attend and vote at the Meeting in
person (or have another person attend and vote on behalf of the Non-Registered
Holder), the Non-Registered Holder should strike out the names of the persons
named in the proxy and insert the Non-Registered Holder's (or such other
person's) name in the blank space provided or, in the case of a voting
instruction form, follow the instructions on the form.
REVOCATION OF PROXY
In addition to revocation in any other manner permitted by law, a
Securityholder who has given a proxy may revoke the proxy by depositing an
instrument in writing executed by the Securityholder or the Securityholder's
attorney authorized in writing (i) at the executive offices of Hemosol at 2585
Meadowpine Blvd., Mississauga, Ontario L5N 8H9, addressed to the attention of
the Secretary, at any time up to and including the last business day preceding
the date of the Meeting, or any postponement(s) or adjournment(s) thereof, or
(ii) with the scrutineers of the Meeting, to the attention of the chair of the
Meeting, at or immediately prior to the commencement of the Meeting or any
postponement(s) or adjournment(s) thereof.
A Non-Registered Holder must comply with the applicable requirements of its
Intermediary in order to revoke voting instructions. Generally, a Non-Registered
Holder may revoke a voting instruction form or a form of waiver of the right to
receive the Meeting Materials and to vote given to an Intermediary at any time
by written notice to the Intermediary, except that an Intermediary is not
required to act on a revocation of a voting instruction form or a form of waiver
of the right to receive Meeting Materials and to vote that is not received by
the Intermediary prior to a certain period specified by such Intermediary.
EXERCISE OF VOTE BY PROXY
Hemosol Securities represented by properly executed proxies will be voted
in accordance with the instructions of the Securityholder on any ballot that may
be called for (provided that Securityholders who are not also Shareholders will
only be eligible to vote and appoint a proxyholder in respect of the Arrangement
Resolution) and, if the Securityholder specifies a choice with respect to any
matter to be acted upon at the Meeting, Hemosol Securities represented by
properly executed proxies will be voted accordingly. IF NO CHOICE IS SPECIFIED
WITH RESPECT TO SUCH MATTER, THE PERSONS DESIGNATED IN THE ACCOMPANYING FORM OF
PROXY WILL VOTE FOR: (I) THE ELECTION OF THE MANAGEMENT NOMINEES AS DIRECTORS OF
HEMOSOL; (II) THE APPOINTMENT OF E&Y AS AUDITORS OF HEMOSOL AND THE
AUTHORIZATION OF THE HEMOSOL BOARD TO FIX THE REMUNERATION OF THE AUDITORS;
(III) THE APPROVAL OF THE HEMOSOL STOCK OPTION PLAN AMENDMENT; (IV) THE APPROVAL
OF THE ARRANGEMENT RESOLUTION; (V) THE APPROVAL OF THE NEW HEMOSOL STOCK OPTION
PLAN; AND (VI) THE APPROVAL OF THE AMENDED AND RESTATED LABCO BY-LAWS. The
enclosed form of proxy confers discretionary authority upon the persons named
therein with respect to amendments or
120
variations to matters identified in the Notice of Meeting and with respect to
other matters that may properly come before the Meeting. At the date of this
Circular, the management of Hemosol knows of no such amendments, variations or
other matters to come before the Meeting, other than the matters referred to in
the Notice of Meeting.
QUORUM, RECORD DATE AND ENTITLEMENT TO VOTE
The presence, in person or by proxy, of Shareholders holding at least 20%
of the total number of the issued Hemosol Shares is necessary for a quorum at
the Meeting. The Hemosol Board has fixed the close of business on March 17, 2004
as the record date for the purpose of determining the Securityholders entitled
to receive notice of, and to vote at, the Meeting. The failure of any
Securityholder to receive notice of the Meeting does not deprive the
Securityholder of a vote at the Meeting. A person who has acquired Hemosol
Securities after the record date is entitled to vote those Securities at the
Meeting upon producing properly endorsed share certificates, or otherwise
establishing ownership to the securities, and requesting the inclusion of his,
her or its name in the list of securityholders not less than ten days before the
date of the Meeting.
At the Meeting, Shareholders will be entitled to one vote per Hemosol
Share, Eligible Convertible Securityholders (other than Broker Optionholders)
will be entitled to one vote per Eligible Convertible Security and Broker
Optionholders will be entitled to one and one-half votes per Broker Option.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
As at March 10, 2004 the following Hemosol Securities were issued and
outstanding:
(a) 56,145,583 Hemosol Shares and no Hemosol Special Shares;
(b) 4,225,891 Eligible Convertible Securities (other than Broker Options);
and
(c) 392,090 Broker Options.
At the Meeting, Hemosol Shareholders will be entitled to an aggregate of
56,145,583 votes and Eligible Convertible Securityholders will be entitled to an
aggregate of 4,617,981 votes.
To the knowledge of the directors and officers of Hemosol, the only person
or company that beneficially owns, directly or indirectly, or exercises control
or direction over more than 10% of the Hemosol Shares is the following:
<Table>
<Caption>
NUMBER OF BENEFICIALLY PERCENTAGE OF OUTSTANDING
NAME OWNED HEMOSOL SHARES HEMOSOL SHARES
- ---- ---------------------- -------------------------
MDS(1)................................................... 6,549,897 11.7
</Table>
- ---------------
Note:
(1) According to information provided by MDS, of the 6,549,897 Hemosol Shares
referred to above, MDS owns 6,087,982 Hemosol Shares directly and 461,915
Hemosol Shares indirectly through MDS Health Ventures (TC) Inc., a
wholly-owned subsidiary of MDS. In addition, 812,246 Hemosol Shares are
held by two entities, for which MDS Capital Corp. and/or its affiliates
provide management services (MDS owns an approximate 47% equity interest in
MDS Capital Corp. and the balance of the equity interest in MDS Capital
Corp. is owned by institutional investors and management). The Hemosol
Shares held by such entities are voted by such entities through authorized
signing officers. MDS and MDS Capital Corp. disclaim beneficial ownership
of the 812,246 Hemosol Shares held by these funds.
PROCEDURE AND VOTES REQUIRED
ELECTION OF DIRECTORS
On any ballot that may be called relating to the election of directors, the
persons named as proxies in the enclosed form of proxy intend to vote the
Hemosol Shares represented by proxies in favour of management nominees for the
election of such persons as directors of Hemosol, unless a Shareholder has
specified in his proxy that the Hemosol Shares held by such Shareholder are to
be withheld from voting for the election of directors. In the event that any
vacancies occur in the slate of such nominees, the persons named as proxies in
the enclosed form of proxy intend to vote the Hemosol Shares represented by such
proxies for the election of such other persons as directors in accordance with
the best judgment of management. Each Shareholder will be entitled to one vote
for each Hemosol Share held. The resolution respecting the election of directors
must be approved at the Meeting by more than 50% of the votes cast by
Shareholders voting, in person or by proxy, at the Meeting. See "Annual Meeting
and Other Special Business -- Election of Directors".
121
APPOINTMENT OF AUDITORS
On any ballot that may be called relating to the appointment of auditors,
the persons named as proxies in the enclosed form of proxy intend to vote the
Hemosol Shares represented by proxies in favour of the appointment of the firm
of E&Y, as the auditors of Hemosol and authorizing the directors of Hemosol to
fix the remuneration of the auditors, unless a Shareholder signing such proxy
has specified otherwise. Each Shareholder will be entitled to one vote for each
Hemosol Share held. The resolution respecting the appointment of auditors and
authorizing the directors of Hemosol to fix the remuneration of the auditors
must be approved at the Meeting by more than 50% of the votes cast by
Shareholders voting, in person or by proxy, at the Meeting. See "Annual Meeting
and Other Special Business -- Appointment of Auditors".
RATIFICATION OF CONDITIONAL GRANTS OF OPTIONS
On any ballot that may be called relating to the approval of the Hemosol
Stock Option Plan Amendment, the persons named as proxies in the enclosed form
of proxy intend to vote the Hemosol Shares represented by proxies in favour of
the approval of the Hemosol Stock Option Plan Amendment, unless a Shareholder
signing such proxy has specified otherwise. Each Shareholder will be entitled to
one vote for each Hemosol Share held. The resolution respecting the approval of
the Hemosol Stock Option Plan Amendment must be approved at the Meeting by more
than 50% of the votes cast by Shareholders voting, in person or by proxy, at the
Meeting. See "Annual Meeting and Other Special Business -- Ratification of
Conditional Grants of Options".
ARRANGEMENT RESOLUTION
At the Meeting, Shareholders will be entitled to one vote per Hemosol
Share, Securityholders (other than Broker Optionholders) will be entitled to one
vote per Hemosol Security and Broker Optionholders will be entitled to one and
one-half votes per Broker Option. The majority required to pass the Arrangement
Resolution, will be, subject to further order of the Court, at least two-thirds
of all the votes cast by Securityholders voting together as a single class, in
person or by proxy, at the Meeting and a majority of all the votes cast by
Minority Shareholders voting, in person or by proxy, at the Meeting. On any
ballot that may be called relating to the approval of the Arrangement
Resolution, the persons named as proxies in the enclosed form of proxy intend to
vote the Hemosol Securities represented by proxies in favour of the approval of
the Arrangement Resolution, unless a Securityholder signing such proxy has
specified otherwise.
APPROVAL OF NEW HEMOSOL STOCK OPTION PLAN
Under the terms of the Interim Order, votes cast by Shareholders at the
Meeting will be deemed to be votes by holders of New Hemosol Shares at a meeting
of the holders of New Hemosol Shares as it relates to the approval of the New
Hemosol Stock Option Plan. On any ballot that may be called relating to the
approval of the New Hemosol Stock Option Plan, the persons named as proxies in
the enclosed form of proxy intend to vote the Hemosol Shares represented by
proxies in favour of the approval of the New Hemosol Stock Option Plan, unless a
Shareholder signing such proxy has specified otherwise. The resolution
respecting the approval of the New Hemosol Stock Option Plan must be approved at
the Meeting by more than 50% of the votes cast by Shareholders voting, in person
or by proxy, at the Meeting. See "Annual Meeting and Other Special Business --
Approval of New Hemosol Stock Option Plan".
APPROVAL OF AMENDED AND RESTATED LABCO BY-LAWS
On any ballot that may be called relating to the approval of the Amended
and Restated Labco By-Laws, the persons named as proxies in the enclosed form of
proxy intend to vote the Hemosol Shares represented by proxies in favour of the
approval of the Amended and Restated Labco By-Laws, unless a Shareholder signing
such proxy has specified otherwise. The resolution respecting the approval of
the Amended and Restated Labco By-Laws must be approved at the Meeting by more
than 50% of the votes cast by Shareholders voting, in person or by proxy, at the
Meeting. See "Annual Meeting and Other Special Business -- Approval of Amended
and Restated Labco By-Laws".
122
ADDITIONAL INFORMATION
Any comparative interim consolidated financial statements, comparative
annual consolidated financial statements, material change reports (excluding
confidential reports) or information circulars which are subsequently filed by
Hemosol with any Canadian Securities Administrator or similar authorities in
Canada after the date of this Circular and prior to the date of the Meeting will
be deemed to be incorporated by reference into this Circular. Any report filed
by Hemosol with the SEC after the date of this Circular will be deemed to be
incorporated by reference into this Circular if and to the extent provided in
such document. Electronic copies of such documents will be available to be
viewed or downloaded from Hemosol's website (www.hemosol.com). Additionally, a
Securityholder may request that a paper copy of such documents be mailed to it,
without charge, by contacting Investor Relations by e-mail at ir@hemosol.com, by
telephone toll-free at 1-800-789-3419, or by facsimile at (416) 815-0080, at any
time prior to the date of the Meeting.
Additional copies of this Circular may be obtained by contacting Hemosol at
the particulars noted above or by contacting Hemosol's registrar and transfer
agent, Computershare, by mail or delivery at 100 University Avenue, 11th Floor,
Toronto, Ontario M5J 2Y1, or by facsimile toll-free at 1-888-453-0330 (or in the
Toronto area at (416) 981-9800), at any time prior to the date of the Meeting.
APPROVAL OF HEMOSOL
The contents of this Circular and the sending thereof to the
Securityholders have been approved by the Hemosol Board.
Toronto, Ontario, March 10, 2004
By Order of the Hemosol Board
(Signed) LEE D. HARTWELL
President, Chief Executive Officer & Chief Financial Officer
123
AUDITORS' CONSENT
We have read Hemosol Inc.'s ("Hemosol") Notice of Annual and Special
Meeting of Securityholders and Management Information Circular (the "Circular")
dated March 10, 2004 with respect to a Plan of Arrangement involving Hemosol,
its securityholders and MDS Inc. We have complied with Canadian generally
accepted standards for an auditor's involvement with offering documents.
We consent to the incorporation by reference in the Circular of our report
to the shareholders of Hemosol on the consolidated balance sheets of Hemosol as
at December 31, 2003 and 2002 and the consolidated statements of loss, deficit
and cash flows for each of the years in the three-year period ended December 31,
2003. Our report is dated March 10, 2004.
We also consent to the use in the Circular of our report to the directors
of Hemosol Corp. on the balance sheet of Hemosol Corp. as at February 24, 2004.
Our report is dated March 10, 2004.
<Table>
Toronto, Canada (signed) ERNST & YOUNG LLP
March 10, 2004 Chartered Accountants
</Table>
124
SCHEDULE 1 -- GLOSSARY OF TERMS
Unless the context otherwise requires, when used in this Circular, the
following terms and phrases shall have the following meanings:
"ADJUSTMENT AMOUNTS" means all amounts paid by the Blood Products Partnership to
Labco pursuant to the terms of the Labco Indemnity Agreement;
"AMENDED AND RESTATED LABCO BY-LAWS" means the amended and restated by-laws of
Labco to be voted upon by the Shareholders at the Meeting, a copy of which is
set out in Annex M to this Circular;
"AMF" means l'Autorite des marches financiers (Quebec);
"ARRANGEMENT" means the arrangement under section 182 of the OBCA on the terms
and conditions set forth in the Plan of Arrangement, as may be amended from time
to time prior to the Effective Time;
"ARRANGEMENT AGREEMENT" means the arrangement agreement dated as of February 11,
2004 between Hemosol and MDS, a copy of which is set out in Annex D to this
Circular, as may be amended from time to time prior to the Effective Time;
"ARRANGEMENT RESOLUTION" means the special resolution of the Securityholders
approving the Plan of Arrangement, the full text of which is set out in Annex A
to this Circular, to be considered and, if deemed advisable, passed by the
Securityholders at the Meeting;
"ARTICLES OF ARRANGEMENT" means the articles of arrangement relating to the
Arrangement required under subsection 183(1) of the OBCA to be sent to the
Director after the Final Order has been granted;
"AUDITED FINANCIAL STATEMENTS" means the audited consolidated balance sheets of
Hemosol as at December 31, 2003 and 2002 and the audited consolidated statements
of loss, deficit and cash flows for each of the years in the three-year period
ended December 31, 2003, including the notes thereto;
"BANK" means The Bank of Nova Scotia or other lender under the Bank Loan;
"BANK LOAN" means the $20 million loan facility made available by the Bank to
Hemosol pursuant to a commitment letter dated October 25, 2002, as amended;
"BLOOD PRODUCTS ASSETS" means all the assets owned or leased by Hemosol
immediately prior to the Effective Time;
"BLOOD PRODUCTS BUSINESS" means the business and operations carried on by
Hemosol and its Subsidiaries immediately prior to the Effective Time;
"BLOOD PRODUCTS CONTRIBUTION AGREEMENT" means the contribution agreement
contemplated by the Plan of Arrangement to be entered into by Hemosol and the
Blood Products Partnership pursuant to which Hemosol will contribute the Blood
Products Assets to the Blood Products Partnership and the Blood Products
Partnership will assume the Blood Products Liabilities from Hemosol;
"BLOOD PRODUCTS LIABILITIES" means all liabilities (contingent or otherwise) and
other obligations of Hemosol immediately prior to the Effective Time, including
without limitation, obligations under the Bank Loan;
"BLOOD PRODUCTS LP UNIT" means a partnership unit of the Blood Products
Partnership;
"BLOOD PRODUCTS PARTNERSHIP" means Hemosol LP, the limited partnership
contemplated by the Arrangement that will acquire the Blood Products Assets from
Hemosol, assume the Blood Products Liabilities from Hemosol and carry on the
Blood Products Business on and after the Effective Date and in which New Hemosol
will hold a general partnership interest of approximately 93% and Labco will
hold a limited partnership interest of approximately 7% upon completion of the
Arrangement;
"BLOOD PRODUCTS PARTNERSHIP AGREEMENT" means the limited partnership agreement
contemplated by the Plan of Arrangement that will set out the terms and
conditions of the Blood Products Partnership and which will be substantially in
the form attached as Exhibit 5 to the Arrangement Agreement;
"BLOOD PRODUCTS SECURITY AGREEMENTS" means the security agreements to be entered
into by the Blood Products Partnership and the Bank pursuant to which the Blood
Products Partnership will grant a security interest in all of its assets to the
Bank and provide certain assignments in favour of the Bank to secure obligations
under the Bank Loan, which security agreements shall be substantially similar to
the current security agreements between Hemosol and the Bank;
125
"BPP GUARANTEE" means a guarantee on terms and conditions substantially similar
to the MDS Guarantee pursuant to which MDS will guarantee the Blood Products
Partnership's obligations under the Bank Loan after the Effective Time;
"BROKER OPTIONS" means the broker compensation options issued by Hemosol on
January 22, 2004 to Loewen, Ondaatje, McCutcheon Limited and Vengate Capital
Partners Company to purchase an aggregate 392,090 Hemosol Shares and 196,045
Hemosol Warrants;
"BROKER OPTIONHOLDERS" means the holders of Broker Options;
"CANADIAN SECURITIES ADMINISTRATORS" means the securities regulators in each of
the provinces of Canada;
"CBCA" means the Canada Business Corporations Act, as amended, including the
regulations promulgated thereunder;
"CCRA" means Canada Customs and Revenue Agency (formerly Revenue Canada) and any
successor thereof;
"CERTIFICATE OF ARRANGEMENT" means the certificate to be endorsed by the
Director pursuant to subsection 183(2) of the OBCA giving effect to the
Arrangement;
"CIRCULAR" means this management information circular, including all Annexes
hereto, distributed by Hemosol in connection with the Meeting;
"COMPUTERSHARE" means Computershare Trust Company of Canada, the registrar and
transfer agent for the Hemosol Shares, with offices at 100 University Avenue,
9(th) Floor, Toronto, Ontario M5J 2Y1;
"COURT" means the Superior Court of Justice of Ontario;
"DIRECTOR" means the director appointed under section 278 of the OBCA;
"DWPV" means Davies Ward Phillips & Vineberg LLP, legal advisor to Hemosol and
the Independent Committee;
"EBITDA" means earnings before interest, taxes, depreciation and amortization;
"E&Y" means Ernst & Young LLP;
"EFFECTIVE DATE" means the date on which the Arrangement becomes effective, as
established by the date shown on the Certificate of Arrangement;
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date;
"ELIGIBLE CONVERTIBLE SECURITIES" means the Hemosol Convertible Securities,
other than the Tranche A Warrants;
"ELIGIBLE CONVERTIBLE SECURITYHOLDERS" means the holders of Eligible Convertible
Securities;
"ESCROW AGREEMENT" means the escrow agreement between New Hemosol, Labco and
CIBC Mellon Trust Company or such other escrow agent acceptable to New Hemosol
and Labco, acting reasonably, contemplated by the Plan of Arrangement and
containing the terms and conditions set out in Exhibit 4 to the Arrangement
Agreement;
"ESCROW AMOUNT" means $1 million to be held in escrow in accordance with the
terms of the Escrow Agreement;
"FINAL ORDER" means the order of the Court approving the Arrangement, to be
applied for by Hemosol following the Meeting if the Arrangement Resolution is
approved and to be granted pursuant to subsection 182(5) of the OBCA, as such
order may be amended or modified by the highest court which hears an appeal in
respect of such order;
"GAAP" means generally accepted accounting principles;
"HEMOLINK" means HEMOLINK(TM) (hemoglobin raffimer), the principal oxygen
therapeutic product of Hemosol;
"HEMOLINK BUILDING" means the manufacturing facility of Hemosol located at 2585
Meadowpine Blvd., Mississauga, Ontario L5N 8H9;
"HEMOSOL" means Hemosol Inc., a corporation existing under the OBCA (as it
exists prior to the Effective Time);
"HEMOSOL BOARD" means the board of directors of Hemosol which currently consists
of 10 members;
126
"HEMOSOL CONVERTIBLE SECURITIES" means all securities of Hemosol that are
convertible or exercisable into or otherwise give the holder the right to
acquire Hemosol Shares or other securities of Hemosol, other than Hemosol
Options, which are outstanding immediately prior to the Effective Time;
"HEMOSOL OPTIONS" means options to purchase Hemosol Shares issued pursuant to
the Hemosol Stock Option Plan;
"HEMOSOL SECURITIES" means, collectively, the Hemosol Shares and the Eligible
Convertible Securities;
"HEMOSOL SHARES" means the common shares in the capital of Hemosol prior to the
Effective Time;
"HEMOSOL SPECIAL SHARES" means the special shares in the capital of Hemosol
prior to the Effective Time;
"HEMOSOL STOCK OPTION PLAN" means the Amended and Restated Stock Option Plan of
Hemosol dated December 7, 2000;
"HEMOSOL STOCK OPTION PLAN AMENDMENT" means the proposed amendment to the
Hemosol Stock Option Plan to increase the maximum number of Hemosol Shares
reserved for issuance thereunder from 3,031,712 to 5,499,298;
"HEMOSOL WARRANTS" means the warrants issued pursuant to a warrant indenture
dated November 28, 2003 between Hemosol and Computershare, each warrant
exercisable into one Hemosol Share;
"INDEPENDENT COMMITTEE" means the independent committee of the Hemosol Board
composed of three independent directors (as that term is defined in Rule 61-501
and Policy Q-27) of Hemosol, formed to evaluate the Arrangement and make a
recommendation to the Hemosol Board whether the Arrangement is in the best
interests of Hemosol and is fair to Non-MDS Securityholders;
"INTERIM ORDER" means the interim order of the Court dated March 9, 2004 under
subsection 182(5) of the OBCA containing declarations and directions with
respect to the Arrangement and the Meeting and granted pursuant to the
application of Hemosol therefor, a copy of which is attached as Annex C to this
Circular;
"INTERMEDIARY" has the meaning given to that term under the heading "General
Proxy Matters -- Non-Registered Holders" in this Circular;
"KPMG" means KPMG Corporate Finance Inc., financial advisor to the Independent
Committee in connection with the Arrangement;
"KPMG FAIRNESS OPINION" means the written opinion of KPMG to the Independent
Committee dated February 11, 2004 relating to the fairness, from a financial
point of view, of the Arrangement to Non-MDS Securityholders, a copy of which is
attached as Annex E to this Circular;
"LABCO" means LPBP Inc., as Hemosol will be renamed after the Effective Time,
which will hold a 99.99% limited partnership interest in the Labs Partnership
and an approximate 7% limited partnership interest in the Blood Products
Partnership, and in which upon completion of the Arrangement MDS will hold,
directly or indirectly, not more than 47.5% of the Labco Class A Shares and 100%
of the Labco Class B Non-Voting Shares, collectively representing 99.56% of the
equity, and Public Shareholders will hold not less than 52.5% of the Labco Class
A Shares representing 0.44% of the equity;
"LABCO BOARD" means the board of directors of Labco from time to time;
"LABCO CLASS A SHARES" means the Class A voting common shares in the capital of
Labco to be created and issued at the Effective Time pursuant to the Articles of
Arrangement and the Plan of Arrangement, having the rights, privileges,
restrictions and conditions as set out in Appendix A to the Plan of Arrangement;
"LABCO CLASS B NON-VOTING SHARES" means the Class B non-voting shares in the
capital of Labco to be created and issued at the Effective Time pursuant to the
Articles of Arrangement and the Plan of Arrangement, having the rights,
privileges, restrictions and conditions as set out in Appendix A to the Plan of
Arrangement;
"LABCO CLASS C SHARES" means the Class C preferred shares in the capital of
Labco to be created and issued at the Effective Time pursuant to the Articles of
Arrangement and the Plan of Arrangement, having the rights, privileges,
restrictions and conditions set out in Appendix A to the Plan of Arrangement;
"LABCO INDEMNITY AGREEMENT" means the indemnity agreement to be entered into by
Labco and the Blood Products Partnership, substantially in the form attached as
Exhibit 12 to the Arrangement Agreement;
"LABCO SHARE CONDITIONS" means the rights, privileges, restrictions and
conditions of the Labco Class A Shares, Labco Class B Non-Voting Shares and
Labco Class C Shares as set out in Appendix A to the Plan of Arrangement;
127
"LABCO SHARES" means, collectively, the Labco Class A Shares, the Labco Class B
Non-Voting Shares and the Labco Class C Shares;
"LABS ASSETS" means the assets listed on Exhibit 6 to the Arrangement Agreement
used to operate the Labs Business which will be contributed to the Labs
Partnership by MDS pursuant to the terms of the Labs Contribution Agreement;
"LABS BUSINESS" means the clinical laboratory services business carried on by
MDS in Ontario immediately prior to the Effective Time which, for greater
certainty, does not include diagnostic imaging, water testing, real estate
investments, the Executive Health Clinic, MDS's joint venture with University
Health Network called Toronto Medical Laboratories and MDS's financial interest
in Windsor Medical Laboratories;
"LABS CONTRIBUTION AGREEMENT" means the contribution agreement contemplated by
the Plan of Arrangement to be entered into by MDS and the Labs Partnership
pursuant to which MDS will contribute the Labs Assets to the Labs Partnership;
"LABS FINANCIAL INFORMATION" means the unaudited summary financial information
of the Labs Business compiled from accounting records of MDS as at October 31,
2003 and for the fiscal years of MDS ended October 31, 2001, 2002 and 2003;
"LABS MANAGEMENT AGREEMENT" means the management agreement to be entered into by
MDS and the Labs Partnership on the Effective Date pursuant to which MDS will
provide the management and administrative services to the Labs Partnership
specified therein and which will be substantially in the form attached as
Exhibit 8 to the Arrangement Agreement;
"LABS PARTNERSHIP" means MDS Laboratory Services, L.P., the limited partnership
contemplated by the Plan of Arrangement that will acquire the Labs Assets from
MDS and carry on the Labs Business on and after the Effective Time, and in which
MDS Subco will hold a 0.01% general partnership interest and Labco will hold a
99.99% limited partnership interest upon the completion of the Arrangement;
"LABS PARTNERSHIP AGREEMENT" means the limited partnership agreement
contemplated by the Plan of Arrangement that will set out the terms and
conditions of the Labs Partnership and which will be substantially in the form
attached as Exhibit 7 to the Arrangement Agreement;
"LABS PARTNERSHIP INTEREST" means the 99.99% limited partnership interest in the
Labs Partnership to be held by Labco upon completion of the Arrangement;
"LETTER OF UNDERSTANDING" means the non-binding letter of understanding between
MDS and Hemosol, accepted and agreed to by Hemosol on October 31, 2003, as
amended;
"MDS" means MDS Inc., a corporation existing under the CBCA;
"MDS ADDITIONAL CLASS A SHARES" means that number of Labco Class A Shares equal
to the difference between (a) 47.5% of the Labco Class A Shares issued and
outstanding upon completion of the Arrangement, or such lesser number of Labco
Class A Shares determined by MDS in its sole discretion, and (b) the number of
Labco Class A Shares held by MDS immediately prior to the transfer of the Labs
Partnership Interest;
"MDS CLASS B NON-VOTING SHARES" means that number of Labco Class B Non-Voting
Shares that will result in MDS holding (in combination with the Labco Class A
Shares held by MDS upon completion of the Arrangement) 99.56% of the total
number of issued and outstanding Labco Class A Shares and Labco Class B
Non-Voting Shares upon completion of the Arrangement;
"MDS GUARANTEE" means the guarantee dated November 22, 2002 by MDS of Hemosol's
obligations under the Bank Loan, as it may be amended from time to time;
"MDS INDEMNITY AGREEMENT" means the indemnity agreement to be entered into by
MDS, New Hemosol and Hemosol, substantially in the form attached as Exhibit 13
to the Arrangement Agreement;
"MDS MOU" means the memorandum of understanding between MDS and Hemosol dated
October 22, 2002, as amended on December 23, 2003;
"MDS SUBCO" means MDS Laboratory Services Inc., a wholly-owned subsidiary of MDS
which will be the general partner of and hold a 0.01% interest in the Labs
Partnership upon completion of the Arrangement;
128
"MEETING" means the annual and special meeting of the Securityholders to be held
on April 20, 2004 to consider and vote on the Arrangement Resolution and the
other matters set out in the Notice of Meeting, and any adjournment(s) or
postponement(s) thereof;
"MEETING MATERIALS" means, collectively, this Circular, the Notice of Meeting
and the form of proxy;
"MINORITY SHAREHOLDERS" means all Shareholders excluding any Shareholders whose
votes are to be excluded at the Meeting for the purposes of minority approval
(as that term is defined in Rule 61-501 and Policy Q-27) of the Arrangement
Resolution at the Meeting;
"MOH" means the Ontario Ministry of Health and Long-Term Care;
"NASDAQ" means The Nasdaq National Market;
"NEW HEMOSOL" means Hemosol Corp., a corporation existing under the OBCA which
will, in effect, be the successor to the Blood Products Business and will hold
an approximate 93% general partnership interest in the Blood Products
Partnership upon completion of the Plan of Arrangement;
"NEW HEMOSOL BOARD" means the board of directors of New Hemosol;
"NEW HEMOSOL CONVERTIBLE SECURITIES" means securities of New Hemosol that are
convertible or exercisable into or otherwise give the holder the right to
acquire New Hemosol Shares or other securities of New Hemosol, but excludes the
New Hemosol Options;
"NEW HEMOSOL MOU" means the memorandum of understanding between MDS and New
Hemosol to be dated the Effective Date relating to the issuance of warrants to
purchase up to 2,000,000 New Hemosol Shares on the same terms as the Tranche B
Warrants except that the number of warrants vesting each month shall be reduced
by 50% and the exercise price shall be reduced by $0.04 per warrant;
"NEW HEMOSOL OPTIONS" means options to purchase New Hemosol Shares issued
pursuant to the New Hemosol Stock Option Plan;
"NEW HEMOSOL SHARE CONDITIONS" means the rights, privileges, restrictions and
conditions of the New Hemosol Shares and the New Hemosol Special Shares, as set
out in Exhibit 9 to the Arrangement Agreement;
"NEW HEMOSOL SHARES" means the common shares in the capital of New Hemosol;
"NEW HEMOSOL SPECIAL SHARES" means the special shares in the capital of New
Hemosol;
"NEW HEMOSOL STOCK OPTION PLAN" means the stock option plan of New Hemosol to be
voted upon by the Shareholders at the Meeting, a copy of which is set out in
Annex F to this Circular;
"NON-MDS SECURITYHOLDERS" means Securityholders who are not affiliates of
Hemosol. The term Non-MDS Securityholders excludes MDS and its affiliates;
"NOTICE OF MEETING" means the notice of Meeting which accompanies this Circular;
"OBCA" means the Business Corporations Act (Ontario), as amended, including the
regulations promulgated thereunder;
"OSC" means the Ontario Securities Commission;
"OUTSIDE DATE" means May 31, 2004;
"PARTNERSHIP INTEREST TRANSFER AGREEMENT" means the transfer agreement
contemplated by the Plan of Arrangement pursuant to which MDS will transfer the
Labs Partnership Interest to Labco and surrender for cancellation 500,000
Tranche A Warrants and the right to acquire 2,000,000 Tranche B Warrants in
consideration for the issuance to MDS of the MDS Additional Class A Shares and
the MDS Class B Non-Voting Shares and Labco will grant to MDS (i) a right of
first refusal in respect of the Labs Partnership Interest exercisable in the
event that Labco receives a bona fide written offer from a third party to
purchase the Labs Partnership Interest and (ii) an option to purchase the Labs
Partnership Interest for fair market value if any steps are taken to wind up the
Labs Partnership or the Labs Partnership proposes to sell all or substantially
all of its assets, otherwise than in the ordinary course of business;
"PARTNERSHIP INTERESTS" means, collectively, the limited partnership interests
in each of the Partnerships to be acquired by Hemosol as part of the
Arrangement;
"PARTNERSHIPS" means, collectively, the Blood Products Partnership and the Labs
Partnership;
129
"PLAN OF ARRANGEMENT" means the plan of arrangement to be proposed under section
182 of the OBCA, substantially in the form attached as Exhibit 1 to the
Arrangement Agreement, as may be amended, modified or supplemented from time to
time in accordance with the Plan of Arrangement and any order of the Court prior
to the Effective Time;
"POLICY Q-27" means AMF Policy Statement No. Q-27 -- Protection of Minority
Securityholders in the Context of Certain Transactions;
"PROMETIC" means ProMetic Biosciences, Ltd., a wholly-owned subsidiary of
ProMetic Life Sciences Inc.;
"PROMETIC MOU" means the binding memorandum of understanding entered into
between Hemosol and ProMetic on December 4, 2003;
"PUBLIC SHAREHOLDERS" means all Shareholders excluding MDS and MDS Health
Ventures (TC) Inc.;
"PWC" means PricewaterhouseCoopers LLP, financial advisors to MDS;
"RULE 61-501" means OSC Rule 61-501 -- Insider Bids, Issuer Bids, Going Private
Transactions and Related Party Transactions;
"SEC" means the United States Securities and Exchange Commission;
"SECURITIES ACT" means the Securities Act (Ontario), as amended;
"SECURITYHOLDERS" means, collectively, Shareholders and Eligible Convertible
Securityholders;
"SHAREHOLDERS" means the holders of Hemosol Shares;
"SPECIFIED HEMOSOL OPTIONS" means collectively (i) 2,766,225 Hemosol Options
with an exercise price of $0.90 per Hemosol Share issued on October 29, 2003
conditional upon TSX and Shareholder approval; (ii) 775,000 Hemosol Options with
an exercise price of $1.60 per Hemosol Share issued on December 11, 2003
conditional upon TSX and Shareholder approval; and (iii) the other Hemosol
Options set out in the definition of "Specified Options" in the Plan of
Arrangement attached as Exhibit 1 to Annex D of this Circular;
"SUBSIDIARIES" means 749235 Ontario Limited, Hemosol (USA) Inc., Hemosol
Research Corporation and any other corporation of which outstanding voting
securities carrying more than 50% of the votes for election of directors are, or
any limited partnership, joint venture or other entity more than 50% of whose
total equity interest is, directly or indirectly, owned or controlled by,
Hemosol;
"SUPPLEMENTAL SUBMISSIONS" means the supplemental submissions to CCRA dated
January 14, 2004, January 16, 2004, January 28, 2004, February 3, 2004 and
February 5, 2004 and such other supplemental submissions to CCRA prior to the
Effective Time requesting amendments and supplements to the Tax Ruling;
"SURRENDERED WARRANTS" means, collectively, (i) 500,000 Tranche A Warrants and
(ii) the right to receive 2,000,000 Tranche B Warrants, in each case to be
surrendered by MDS under the Arrangement;
"TAX" or "TAXES" means all federal, state, provincial, territorial, county,
municipal, local or foreign taxes, duties, imposts, levies, assessments, tariffs
and other charges imposed, assessed or collected by a governmental authority
including, but not limited to, (i) any gross income, net income, gross receipts,
business, royalty, capital, capital gains, goods and services, value added,
severance, stamp, franchise, occupation, premium, capital stock, sales and use,
real property, personal property, ad valorem, transfer, licence, profits,
windfall profits, environmental, payroll, employment, employer health, pension
plan, anti-dumping, countervail, excise, severance, stamp, occupation, or
premium tax, (ii) all withholdings on amounts paid to or by Hemosol or Labco or
MDS or other Subsidiaries, (iii) all employment insurance premiums, Canada,
Quebec and any other pension plan contributions or premiums, (iv) any fine,
penalty, interest, or addition to tax, (v) any tax imposed, assessed, or
collected or payable pursuant to any tax-sharing agreement or any other contract
relating to the sharing or payment of any such tax, levy, assessment, tariff,
duty, deficiency, or fee, and (vi) any liability for any of the foregoing as a
transferee, successor, guarantor, or by contract or by operation of law;
"TAX ACT" means the Income Tax Act (Canada), as amended;
"TAX LOSSES" means, collectively, the aggregate of the following amounts: (i)
federal non-capital losses, (ii) Ontario non-capital losses, (iii) federal
scientific research and experimental development deductions, (iv) federal
investment tax credits and (v) Ontario scientific research and experimental
development deductions, each as more particularly defined in the Arrangement
Agreement;
130
"TAX RETURNS" means all returns, reports, declarations, statements, bills,
schedules, forms or written information of, or in respect of, Taxes which are
required to be filed with, or supplied to, any governmental authority;
"TAX RULING" means the tax ruling issued by CCRA dated September 23, 2003 in
respect of the transactions contemplated in the Arrangement Agreement, together
with the supplement thereto dated February 5, 2004, as they may be further
supplemented or amended from time to time;
"TRANCHE A WARRANTS" means the warrants of Hemosol issued to MDS entitling MDS
to acquire, on the due exercise thereof, up to 6,000,000 Hemosol Shares at an
exercise price of $1.00 per Hemosol Share, on the terms and conditions set out
in the warrant certificate dated November 22, 2002;
"TRANCHE B WARRANTS" means warrants of Hemosol to purchase up to 4,000,000
Hemosol Shares to be issued to MDS in certain circumstances on the terms and
conditions set out in the MDS MOU;
"TSX" means the Toronto Stock Exchange;
"U.S. EXCHANGE ACT" means the United States Securities Exchange Act of 1934, as
amended;
"US HOLDERS" means a beneficial owner of Hemosol Shares that is (i) an
individual who is a United States citizen or resident, (ii) a corporation (an
entity taxed as a corporation for U.S. federal income tax purposes) created or
organized in the United States or under the laws of the United States or of any
state or the District of Columbia of the United States, (iii) a trust, if one or
more U.S. persons has authority to control all substantial decisions of the
trust and a U.S. court is able to exercise primary supervision over the
administration of the trust or (iv) an estate, the income of which is subject to
U.S. federal income tax regardless of its source;
"U.S. SECURITIES ACT" means the United States Securities Act of 1933, as
amended; and
"US$" means the lawful currency of the United States of America.
131
ANNEX A -- FORM OF ARRANGEMENT RESOLUTION
RESOLVED as a special resolution of securityholders that:
1. The arrangement (the "Arrangement") under section 182 of the Business
Corporations Act (Ontario) substantially as set out in the Plan of
Arrangement (the "Plan of Arrangement"), attached as Exhibit 1 to the
Arrangement Agreement attached as Annex D to the management information
circular of Hemosol Inc. (the "Corporation") dated March 10, 2004 (the
"Circular") is hereby authorized and approved.
2. The Arrangement Agreement (the "Arrangement Agreement") made as of February
11, 2004 between the Corporation and MDS Inc. attached as Annex D to the
Circular is hereby confirmed, ratified and approved.
3. Notwithstanding that this resolution has been duly passed by the
securityholders of the Corporation or that the Arrangement has been
approved by the Superior Court of Justice of Ontario, the board of
directors of the Corporation is hereby authorized and empowered, without
further notice to, or approval of, the securityholders of the Corporation:
(i) to amend the Arrangement Agreement and the Plan of Arrangement to the
extent permitted by the Arrangement Agreement; and (ii) not to proceed with
the Arrangement or revoke this resolution at any time prior to the issue of
a certificate giving effect to the Arrangement, but only if the Arrangement
Agreement is terminated in accordance with Article 8 thereof.
4. Any officer or director of the Corporation is hereby authorized, for and on
behalf of the Corporation, to execute and deliver articles of arrangement
and all other documents and do all such other acts or things as such person
may determine to be necessary or desirable to give effect to this
resolution, the execution of any such document or the doing of any such
other act or thing being conclusive evidence of such determination.
A-1
ANNEX B -- NOTICE OF APPLICATION
Commercial List File No. 04-CL-5351
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
IN THE MATTER OF the Business Corporations Act, R.S.O. 1990, c. B.16, as
amended, Section 182
AND IN THE MATTER OF Rule 14.05(2) of the Rules of Civil Procedure
AND IN THE MATTER OF a proposed arrangement involving Hemosol Inc., its
securityholders and MDS Inc.
NOTICE OF APPLICATION
TO: THE RESPONDENTS
A LEGAL PROCEEDING HAS BEEN COMMENCED BY THE APPLICANT. The claim made by
the Applicant appears on the following page.
THIS APPLICATION will come on for a hearing before a Judge presiding over
the Commercial List at 393 University Avenue, Toronto on April 22, 2004 at 10:00
a.m. or as soon after that time as the matter can be heard.
IF YOU WISH TO OPPOSE THIS APPLICATION, to receive notice of any step in
the Application, or to be served with any documents in the Application, you or
an Ontario lawyer acting for you must forthwith prepare a Notice of Appearance
in Form 38A prescribed by the Rules of Civil Procedure, serve it on the
Applicant's lawyer or, where the Applicant does not have a lawyer, serve it on
the Applicant, and file it, with proof of service, in this court office, and you
or your lawyer must appear at the hearing.
IF YOU WISH TO PRESENT AFFIDAVIT OR OTHER DOCUMENTARY EVIDENCE TO THE COURT
OR TO EXAMINE OR CROSS-EXAMINE WITNESSES ON THE APPLICATION, you or your lawyer
must, in addition to serving your Notice of Appearance, serve a copy of the
evidence on the Applicant's lawyer or, where the Applicant does not have a
lawyer, serve it on the Applicant, and file it, with proof of service, in the
court office where the Application is to be heard as soon as possible, but not
later than 2:00 p.m. on the day before the hearing.
IF YOU FAIL TO APPEAR AT THE HEARING, JUDGMENT MAY BE GIVEN IN YOUR ABSENCE
AND WITHOUT FURTHER NOTICE TO YOU. IF YOU WISH TO OPPOSE THIS APPLICATION BUT
ARE UNABLE TO PAY LEGAL FEES, LEGAL AID MAY BE AVAILABLE TO YOU BY CONTACTING A
LOCAL LEGAL AID OFFICE.
Dated: March 9, 2004
Issued by the Superior Court of Justice
of Ontario
Address of the Court Office:
393 University Avenue
Toronto, ON M5G 1E6
TO: THIS HONOURABLE COURT
AND TO: ALL HOLDERS OF COMMON SHARES, WARRANTS AND BROKER COMPENSATION
OPTIONS OF HEMOSOL INC.
B-1
APPLICATION
1. The Applicant, Hemosol Inc. (the "Corporation"), makes application for:
(a) an Interim Order in the form at tab 3 of this Record for directions
pursuant to section 182(5) of the Business Corporations Act, R.S.O.
1990, c. B.16, as amended ("OBCA");
(b) an order approving the plan of arrangement (the "Plan of Arrangement")
proposed by the Corporation substantially in the form described in the
Information Circular to be distributed to the holders of common
shares, warrants and broker compensation options of the Corporation,
which is marked as Exhibit "A" to the affidavit of Dirk Alkema, filed
in this proceeding; and
(c) such further and other relief as this Honourable Court deems just.
2. THE GROUNDS for the Application are:
(a) all statutory requirements under the OBCA have been fulfilled;
(b) the proposed Plan of Arrangement is in the best interests of the
Corporation, is fair and reasonable to the securityholders of the
Corporation, and is put forward in good faith;
(c) section 182 of the OBCA;
(d) Rules 14.05(2) and 38 of the Rules of Civil Procedure; and
(e) such further and other grounds as counsel may advise and this
Honourable Court may permit.
3. THE FOLLOWING DOCUMENTARY EVIDENCE will be used at the hearing of the
Application:
(a) such Interim Order as may be granted by this Honourable Court;
(b) the Affidavit of Dirk Alkema, sworn March 8, 2004, and the exhibits
thereto and other materials referred to therein;
(c) the supplementary affidavit material, to be sworn, and the exhibits
thereto and other materials referred to therein; and
(d) such further and other materials as counsel may advise and this
Honourable Court may permit.
<Table>
Date of Issue: March 9, 2004 Davies Ward Phillips & Vineberg LLP
Barristers and Solicitors
1 First Canadian Place
44(th) Floor
Toronto, ON M5X 1B1
Luis Sarabia (LSUC # 37116M)
Tel: 416.863.0900
Fax: 416.863.0871
Solicitors for Hemosol Inc.
</Table>
B-2
ANNEX C -- INTERIM ORDER
Commercial List File No. 04-CL-5351
ONTARIO
SUPERIOR COURT OF JUSTICE
COMMERCIAL LIST
<Table>
THE HONOURABLE ) TUESDAY, THE 9(TH) DAY
)
MR. JUSTICE SPENCE ) OF MARCH, 2004
</Table>
IN THE MATTER OF the Business Corporations Act, R.S.O. 1990, c. B.16, as
amended, Section 182
AND IN THE MATTER OF Rule 14.05(2) of the Rules of Civil Procedure
AND IN THE MATTER OF a proposed arrangement involving Hemosol Inc., its
securityholders
and MDS Inc.
ORDER
THIS MOTION, made without notice by the Applicant, Hemosol Inc.
("Hemosol"), for an interim order pursuant to section 182 of the Business
Corporations Act (Ontario), R.S.O. 1990, c. B.16, as amended (the "OBCA"), was
heard this day at 393 University Avenue, Toronto, Ontario.
ON READING the Notice of Application herein, the Notice of Motion herein,
the Affidavit of Dirk Alkema sworn March 8, 2004 and the exhibits thereto, and
upon hearing the submissions of counsel for Hemosol.
THE MEETING
1. THIS COURT ORDERS that Hemosol call, hold and conduct a special meeting
(the "Meeting") of the holders of its common shares, warrants and broker
compensation options (the "Securityholders") on April 20, 2004 in Toronto,
Ontario to consider and, if deemed advisable, to pass, with or without
variation, a special resolution (the "Arrangement Resolution") to approve
the arrangement described in the Plan of Arrangement attached as Exhibit 1
to Annex D to the Management Information Circular of Hemosol dated March
10, 2004 (the "Information Circular") attached as Exhibit "A" to the
Affidavit of Dirk Alkema.
2. THIS COURT ORDERS that the Meeting shall be called, held and conducted in
accordance with the provisions of the OBCA, the by-laws of Hemosol Inc.,
the Information Circular and this Order.
3. THIS COURT ORDERS that each Securityholder shall be entitled at the Meeting
to one vote per common share held by Securityholders or which they are
entitled to receive upon the full exercise of warrants or broker
compensation options (and the underlying warrants) they hold (excluding
warrants held by MDS), whether such warrants or broker compensation options
are currently exercisable or not.
4. THIS COURT ORDERS that the procedure for the use of proxies at the Meeting
shall be as set out in the Information Circular.
5. THIS COURT ORDERS that the only persons entitled to attend or speak at the
Meeting shall be the Securityholders, their proxy holders, the directors of
Hemosol, the auditors of Hemosol, and the professional legal and financial
advisors to Hemosol, and such other persons with the permission of the
Chair of the Meeting.
6. THIS COURT ORDERS that Hemosol may in its discretion waive generally the
time limits for the deposit of proxies by Securityholders, if Hemosol deems
it advisable to do so.
C-1
ADJOURNMENTS
7. THIS COURT ORDERS that Hemosol, if it deems advisable, may adjourn or
postpone the Meeting on one or more occasions, without the necessity of
first convening the Meeting or first obtaining any vote of Securityholders
respecting the adjournment or postponement and notice of any such
adjournment or postponement shall be given by press release, newspaper
advertisement or by notice to the Securityholders by one of the methods
specified in paragraph 8 herein, as determined to be the most appropriate
method of communication by the Board of Directors of Hemosol.
NOTICE
8. THIS COURT ORDERS that the Information Circular, Notice of Meeting and
Notice of Application in substantially the same form as contained in
Exhibits "A", "B" and "C", respectively, to the Affidavit of Dirk Alkema
(with such amendments thereto as counsel for Hemosol may advise are
necessary or desirable, provided that such amendments are not inconsistent
with this Order) shall be served on the Securityholders of record at the
close of business on March 17, 2004 and the directors and auditors of
Hemosol, by personal service or by mailing the same by prepaid ordinary or
first class mail to such persons at their recorded addresses as they appear
on the books of Hemosol at the close of business on March 17, 2004 being at
least 30 days prior to the date of the Meeting, excluding the date of
mailing and the date of the Meeting, or if no address is shown therein,
then to the last address of the person known to the Secretary of Hemosol,
and substantial compliance with this paragraph shall constitute good and
sufficient notice of the Meeting.
9. THIS COURT ORDERS that the accidental failure or omission to give notice of
the Meeting to any one or more Securityholders or any other person, or any
failure or omission to give notice as a result of events beyond the
reasonable control of Hemosol (including without limitation any inability
to utilize postal services) shall not constitute a breach of this Order or
a defect in the calling of the Meeting and shall not invalidate any
resolution passed or proceedings taken at the Meeting.
AMENDMENTS
10. THIS COURT ORDERS that Hemosol may make such amendments, revisions or
supplements to the Arrangement as it may determine, without any additional
notice to the Securityholders, and the Arrangement as so amended, revised or
supplemented shall be the Arrangement submitted to the Meeting and the
subject of the Arrangement Resolution.
VOTING
11. THIS COURT ORDERS that votes shall be taken at the Meeting on the basis of
one vote per common share held by Securityholders or which they are entitled
to receive upon the full exercise of warrants or broker compensation options
(and the underlying warrants) they hold (excluding warrants held by MDS),
whether such warrants or broker compensation options are currently
exercisable or not, and that, subject to further order of this court, the
Arrangement Resolution will be considered to have been adopted by the
Securityholders upon approval by at least 66#% of the votes cast by the
Securityholders, voting together as a single class, present in person or
represented by proxy at the Meeting.
12. THIS COURT ORDERS that only those Securityholders present or represented by
proxy at the Meeting who are entitled to vote at the Meeting pursuant to the
provisions of the OBCA shall be entitled to vote at the Meeting and, for the
purposes of the Meeting, any spoiled votes, illegible votes, defective votes
and abstentions shall be deemed to be votes not cast.
C-2
APPLICATION FOR APPROVAL OF PLAN
13. THIS COURT ORDERS that, following the approval of the Arrangement Resolution
at the Meeting in the manner set forth in this Order, Hemosol may apply
before this Court on April 22, 2004 for approval of the Plan of Arrangement
and that service of the Notice of Application herein, in accordance with
paragraph 8 of this Order, shall constitute good and sufficient service of
such Notice of Application upon all persons who are entitled to receive such
Notice of Application pursuant to the Order and no other form of service
need be made and no other material need be served on such persons in respect
of these proceedings, unless a Notice of Appearance is served on Hemosol's
solicitor, in which case Hemosol shall serve such person with notice of the
date of the application for approval, together with a copy of any additional
materials to be used in support of such application.
14. THIS COURT ORDERS that any party who wishes to oppose the application for
approval of the Arrangement shall serve upon Hemosol's solicitor and upon
other parties who have filed a Notice of Appearance a notice setting out the
basis for such opposition and a copy of the materials to be used to oppose
the application at least five days before the date set for the hearing to
approve the Plan of Arrangement or such shorter time as the Court, by order,
may allow.
(signed)
--------------------
The Honourable Mr. Justice Spence
C-3
ANNEX D -- ARRANGEMENT AGREEMENT AND PLAN OF ARRANGEMENT
ARRANGEMENT AGREEMENT
BETWEEN
HEMOSOL INC.
AND
MDS INC.
DATED
FEBRUARY 11, 2004
D-1
ARRANGEMENT AGREEMENT
THIS AGREEMENT is made as of the 11th day of February, 2004
B E T W E E N:
HEMOSOL INC., a corporation governed by
the laws of the Province of Ontario (the
"CORPORATION")
- and -
MDS INC., a corporation governed by the
laws of Canada ("MDS")
WHEREAS the Corporation and MDS propose to restructure the business and
affairs of the Corporation pursuant to an arrangement under section 182 of the
Business Corporations Act (Ontario);
AND WHEREAS the arrangement will be on the terms and conditions set forth
in the plan of arrangement attached hereto as Exhibit 1;
AND WHEREAS the board of directors of the Corporation has unanimously
determined (with the MDS representatives on the board of directors of the
Corporation abstaining from voting) that the arrangement is fair to the
shareholders of the Corporation (other than MDS and its affiliates and
associates) and is in the best interests of the Corporation and will recommend
that the shareholders of the Corporation vote in favour of the arrangement, all
on the terms and subject to the conditions contained herein;
AND WHEREAS the board of directors of MDS has approved MDS entering into
this agreement, all on the terms and subject to the conditions contained herein;
NOW THEREFORE THIS AGREEMENT WITNESSES THAT, in consideration of the
representations, warranties, covenants and agreements herein contained, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged by each party, the parties hereto hereby covenant and agree
as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the subject matter or context is inconsistent
therewith, the following terms have the following meanings:
"ACQUISITION PROPOSAL" has the meaning set out in subsection 4.3(a).
"AGREEMENT" means this arrangement agreement as amended, restated or
supplemented and includes all Exhibits attached hereto.
"APPLICABLE LAW" means all laws, statutes, codes, ordinances, decrees,
rules, regulations, by-laws, judicial or arbitral or administrative or
ministerial or departmental or regulatory judgements, orders, decisions,
rulings or awards, including general principles of common and civil law, and
conditions of any grant of approval, permission, authority or license of any
court, governmental entity, statutory body (including the TSX or NASDAQ) or
self-regulatory authority applicable to a Person or its business,
undertaking, property or securities.
"ARRANGEMENT" means the arrangement under section 182 of the OBCA on the
terms and conditions set out in the Plan of Arrangement.
"ARRANGEMENT RESOLUTION" means the resolution of the Securityholders
approving the Plan of Arrangement as required by Applicable Law
substantially in the form which is to be attached to the Circular.
"ARTICLES OF ARRANGEMENT" means the articles of arrangement in respect of
the Arrangement in the form required by the OBCA to be sent to the Director
after the Final Order is made.
D-2
"AUDITED FINANCIAL STATEMENTS" means the audited consolidated balance sheets
of the Corporation as at December 31, 2002 and 2001 and the accompanying
audited consolidated statements of earnings, retained earnings and cash flow
for the years then ended, including the notes thereto, and the report of the
auditors of the Corporation thereon.
"BANK" means The Bank of Nova Scotia or other lender under the Bank Loan.
"BANK LOAN" means the $20,000,000 loan facility made available by the Bank
to the Corporation pursuant to a commitment letter dated October 25, 2002,
as amended.
"BENEFIT PLANS" means employee benefit, welfare, supplemental employment
benefit, bonus, pension, profit sharing, deferred compensation, stock
compensation, stock option or purchase, retirement, hospitalization
insurance, medical, dental, legal, disability and similar plans or
arrangements or practices applicable to present or former employees,
directors or independent contractors of a Person which are currently
maintained or participated in by a Person and each loan to a non-officer of
a Person and each loan to an officer or director of a Person.
"BLOOD PRODUCTS ASSETS" means all of the assets owned or leased by the
Corporation immediately prior to the Effective Time.
"BLOOD PRODUCTS CONTRIBUTION AGREEMENT" means the contribution agreement
contemplated by the Plan of Arrangement to be entered into by the
Corporation and the Blood Products Limited Partnership pursuant to which the
Blood Products Limited Partnership will acquire the Blood Products Assets
and assume the Blood Products Liabilities from the Corporation.
"BLOOD PRODUCTS LIABILITIES" means all liabilities (contingent and
otherwise) and other obligations of the Corporation immediately prior to the
Effective Time, including without limitation, obligations under the Bank
Loan.
"BLOOD PRODUCTS LIMITED PARTNERSHIP" means the limited partnership
contemplated by the Plan of Arrangement that will acquire the Blood Products
Assets from the Corporation, assume the Blood Products Liabilities from the
Corporation and carry on the Business on and after the Effective Time, and
in which New Hemosol will hold a general partnership interest of
approximately 93% and the Corporation will hold a limited partnership
interest of approximately 7% upon completion of the Plan of Arrangement.
"BLOOD PRODUCTS LP AGREEMENT" means the limited partnership agreement
contemplated by the Plan of Arrangement that will set out the terms and
conditions of the Blood Products Limited Partnership and which will be
substantially in the form attached hereto as Exhibit 5.
"BLOOD PRODUCTS SECURITY AGREEMENTS" means the security agreements to be
entered into by the Blood Products Limited Partnership and the Bank pursuant
to which the Blood Products Limited Partnership will grant a security
interest in all of its assets to the Bank and provide certain assignments in
favour of the Bank to secure obligations under the Bank Loan which security
agreements shall be substantially similar to the existing security
agreements between the Corporation and the Bank.
"BOARD" means the board of directors of the Corporation.
"BPP GUARANTEE" has the meaning set out in subsection 5.1(d)(vii).
"BUSINESS" means the business and operations carried on by the Corporation
and its Subsidiaries immediately prior to the Effective Time.
"BUSINESS DAY" means a day, other than Saturday, Sunday, or a statutory or
civic holiday in Toronto, Canada.
"CANADIAN SECURITIES ADMINISTRATORS" means the securities regulators in each
of the provinces and territories of Canada.
"CIRCULAR" means the notice of the Special Meeting and the management
information circular of the Corporation, including all schedules thereto, to
be mailed to Shareholders in connection with the Special Meeting, as it may
be amended from time to time.
"CLASS A COMMON SHARES" means the Class A voting common shares of the
Corporation to be created and issued at the Effective Time pursuant to the
Articles of Arrangement and the Plan of Arrangement with the terms and
conditions set out in Appendix A to the Plan of Arrangement.
D-3
"CLASS B NON-VOTING SHARES" means the Class B non-voting shares of the
Corporation to be created and issued at the Effective Time pursuant to the
Articles of Arrangement and the Plan of Arrangement with the terms and
conditions set out in Appendix A to the Plan of Arrangement.
"CLASS C PREFERRED SHARES" means the Class C preferred shares of the
Corporation to be created and issued at the Effective Time pursuant to the
Articles of Arrangement and the Plan of Arrangement with the terms and
conditions set out in Appendix A to the Plan of Arrangement.
"CLINICAL PROGRAMS" has the meaning set out in subsection (r) of Exhibit 2
hereto.
"COMMON SHARES" means common shares in the capital of the Corporation,
including all common shares issued on the exercise of Options.
"CONVERTIBLE SECURITIES" means the securities of the Corporation that are
convertible or exercisable into or otherwise give the holder the right to
acquire Common Shares or other securities of the Corporation, all of which
are listed in the Corporation Disclosure Letter.
"CONVERTIBLE SECURITYHOLDERS" means the holders of Convertible Securities
other than MDS and holders of Options.
"CORPORATION DISCLOSURE LETTER" means that certain letter dated the date
hereof delivered by the Corporation to MDS.
"CORPORATION INDEMNITY AGREEMENT" means the indemnity agreement to be
entered into by the Corporation and the Blood Products Limited Partnership
and which will be substantially in the form attached hereto as Exhibit 12.
"CORPORATION MATERIAL AGREEMENT" has the meaning set out in subsection (w)
of Exhibit 2 hereto.
"COURT" means the Ontario Superior Court of Justice.
"DIRECTOR" means the Director appointed under section 278 of the OBCA.
"DISCHARGE" means any discharge, emission, release, deposit, issuance,
spray, escape, spill, leak, and shall also have the various meanings
attributed to such term in Environmental Law.
"EFFECTIVE DATE" means the date upon which the Plan of Arrangement becomes
effective as established by the date of issue shown on the certificate of
arrangement issued by the Director pursuant to section 183 of the OBCA.
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date.
"ENVIRONMENT" means the ambient air, all layers of the atmosphere, surface
water, underground water, all land, all living organisms and the interacting
natural systems that include components of air, land, water, organic and
inorganic matter and living organisms.
"ENVIRONMENTAL COMPLIANCE REVIEW" means any written review, investigation,
audit, assessment or report, whether prepared internally or externally,
relating to liability in connection with the Environment, compliance with
Environmental Law, or the existence or management of any issues or
circumstances relevant to the Environment.
"ENVIRONMENTAL LAW" means all applicable federal, state, provincial,
municipal or local statutes, regulations, by-laws, orders, rules, policies
or guidelines of any governmental or regulatory body or agency having the
force of law, and any requirements or obligations arising under the common
law, relating to the Environment, the transportation of dangerous goods or
occupational health and safety.
"ENVIRONMENTAL PERMITS" means all permits, certificates, approvals,
consents, authorizations, registrations and licenses issued by or provided
to, as the case may be, any government, governmental or regulatory body or
agency pursuant to an Environmental Law.
"ESCROW AGREEMENT" means the escrow agreement between New Hemosol, the
Corporation and CIBC Mellon Trust Company or such other escrow agent
acceptable to the parties hereto, acting reasonably, contemplated by the
Plan of Arrangement and containing the terms and conditions set out in
Exhibit 4.
"ESCROWED REDEMPTION AMOUNT" means the $1 million to be held in escrow in
accordance with the terms of the Escrow Agreement.
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"EXISTING STOCK OPTION PLAN" means the Corporation's stock option plan dated
December 7, 2000.
"FEDERAL INVESTMENT TAX CREDITS" means the amount determined under
subsection 127(9) of the Federal Tax Act.
"FEDERAL NON-CAPITAL LOSSES" means the amounts determined under subsection
111(8) of the Federal Tax Act.
"FEDERAL SCIENTIFIC RESEARCH AND DEVELOPMENT DEDUCTIONS" means the maximum
amount deductible by the Corporation in computing its income for a taxation
year pursuant to subsection 37(1) of the Federal Tax Act.
"FEDERAL TAX ACT" means the Income Tax Act (Canada), as amended.
"FINAL ORDER" means the order of the Court made in connection with the
approval of the Arrangement following the application therefor contemplated
by subsection 2.1(b)(iv) hereof, as such order may be amended or modified by
the highest court which hears an appeal in respect of such order.
"HEMOLINK BUILDING" means the manufacturing facility of the Corporation
located at 2585 Meadowpine Blvd., Mississauga, Ontario, L5N 8H9.
"INDEPENDENT COMMITTEE" means the committee of the independent members of
the Board created to, among other things, review and report upon the
proposed Arrangement.
"INDEPENDENT VALUATOR" has the meaning set out in Section 2.4.
"INTELLECTUAL PROPERTY" means all issued patents, patent applications
(whether in draft form or filed with the patent office having jurisdiction),
copyrights, trade-marks, tradenames (including applications for all of the
foregoing and renewals, divisions, extensions and reissues, where applicable
relating thereto), maskworks, inventions and discoveries (whether patentable
or not), licences, trade secrets, patterns, drawings, computer program
software, technical information, research data, concepts, methods,
procedures, designs, know-how, proprietary or confidential information of a
Person and any and all rights in the aforementioned and any other
intellectual property now or hereinafter owned by or licensed to the Person.
"INTERIM ORDER" means the interim order of the Court made in connection with
the approval of the Arrangement.
"KPMG" means KPMG Corporate Finance Inc., the financial advisor to the
Independent Committee in connection with the Arrangement.
"LABS ASSETS" means those assets listed on Exhibit 6 hereto used to operate
the Labs Business which will be contributed to the Labs Limited Partnership
by MDS pursuant to the terms of the Labs Contribution Agreement.
"LABS BUSINESS" means the clinical laboratory services business carried on
by MDS in Ontario immediately prior to the Effective Time which, for greater
certainty, does not include diagnostic imaging, water testing, real estate
investments, the Executive Health Clinic, MDS' joint venture with University
Health Network called Toronto Medical Laboratories and MDS' financial
interest in Windsor Medical Laboratories.
"LABS CONTRIBUTION AGREEMENT" means the contribution agreement contemplated
by the Plan of Arrangement to be entered into by MDS and the Labs Limited
Partnership pursuant to which MDS will contribute the Labs Assets to the
Labs Limited Partnership.
"LABS FINANCIAL INFORMATION" means the summary of unaudited financial
information of the Labs Business compiled from accounting records of MDS in
connection with the Arrangement for the fiscal years of MDS ended October
31, 2001, 2002 and 2003 as attached as Exhibit 1 to the MDS Disclosure
Letter.
"LABS LEASED LOCATIONS" means those leased locations of the Labs Business
set out in the MDS Disclosure Letter at Exhibit 2.
"LABS LIMITED PARTNERSHIP" means the limited partnership contemplated by the
Plan of Arrangement that will acquire the Labs Assets and carry on the Labs
Business on and after the Effective Time, and in which Subco will hold a
0.01% general partnership interest and the Corporation will hold a 99.99%
limited partnership interest upon the completion of the Arrangement.
"LABS LIMITED PARTNERSHIP INTEREST" means the 99.99% limited partnership
interest in the Labs Limited Partnership.
D-5
"LABS LP AGREEMENT" means the limited partnership agreement contemplated by
the Plan of Arrangement that will set out the terms and conditions of the
Labs Limited Partnership and which will be substantially in the form
attached hereto as Exhibit 7.
"LABS MANAGEMENT AGREEMENT" means the management agreement to be entered
into by MDS and the Labs Limited Partnership on the Effective Date pursuant
to which MDS will provide the management and administrative services to the
Labs Limited Partnership specified therein and which will be substantially
in the form attached hereto as Exhibit 8.
"LABS MATERIAL AGREEMENT" has the meaning set out in subsection (k) of
Exhibit 3 hereto.
"LICENSING ACT" means the Laboratory and Specimen Collection Centre
Licensing Act (Ontario).
"MATERIAL ADVERSE EFFECT" with respect to a Person or the Labs Business
means a material adverse effect on the business, affairs, properties,
assets, liabilities, capitalization, operations, results of operations, or
condition (financial or otherwise) of such Person and its subsidiaries (in
the case of the Corporation, the Subsidiaries) or the Labs Business taken as
a whole, other than a material adverse effect relating to: (a) general
political, financial or economic conditions or the state of securities
markets in general; (b) any change in the trading price of the securities of
such Person other than as a result of the foregoing; and (c) the
biotechnology industry or the laboratory services industry, as applicable,
in general and not specifically relating to or affecting such Person.
"MDS CLASS A SHARES" means that number of Class A Common Shares equal to the
difference between (a) 47.5% of the Class A Common Shares issued and
outstanding upon completion of the Arrangement or such lesser number of
Class A Common Shares determined by MDS in its sole discretion and (b) the
number of Class A Common Shares held by MDS immediately prior to the
transfer of the Labs Limited Partnership Interest to the Corporation.
"MDS CLASS B SHARES" means that number of Class B Non-Voting Shares that
will result in MDS holding (in combination with the MDS Class A Shares)
99.5% of the total number of issued and outstanding Class A Common Shares
and Class B Non-Voting Shares upon completion of the Arrangement.
"MDS DISCLOSURE LETTER" means that certain letter dated the date hereof
delivered by MDS to the Corporation.
"MDS GUARANTEE" means the guarantee dated November 22, 2002 by MDS of the
Corporation's obligations under the Bank Loan, as it may be amended from
time to time.
"MDS INDEMNITY AGREEMENT" means the indemnity agreement to be entered into
by New Hemosol and MDS and which will be substantially in the form attached
hereto as Exhibit 13.
"MDS MOU" means the memorandum of understanding between MDS and the
Corporation dated October 22, 2002, as amended on December 23, 2003.
"MEETING DATE" means the date of the Special Meeting.
"MINORITY SHAREHOLDERS" means all of the Shareholders other than MDS and
such other Persons whose votes cannot be included for the purposes of
minority approval (as such term is defined in Rule 61-501) of the
Arrangement Resolution at the Special Meeting.
"NASDAQ" means The NASDAQ National Market.
"NEW HEMOSOL" means Hemosol Corp., a corporation to be incorporated under
the OBCA and which will hold an approximate 93% general partnership interest
in the Blood Products Limited Partnership upon completion of the Plan of
Arrangement.
"NEW HEMOSOL MOU" means the memorandum of understanding between MDS and New
Hemosol to be dated the Effective Date relating to the issuance of warrants
to purchase up to 2,000,000 New Hemosol Shares on substantially the same
terms as the Tranche B Warrants except that the number of warrants vesting
each month shall be reduced by 50% and the exercise price shall be reduced
by $0.04 per warrant.
"NEW HEMOSOL SHARE CONDITIONS" means the terms and conditions of the New
Hemosol Shares set out in Exhibit 9 hereto.
D-6
"NEW HEMOSOL SHARES" means the common shares of New Hemosol that will be
issued pursuant to the Plan of Arrangement.
"OBCA" means the Business Corporations Act (Ontario).
"ONTARIO NON-CAPITAL LOSSES" means the amounts determined for the purposes
of the Corporations Tax Act (Ontario), as amended, by reference to
subsection 111(8) of the Federal Tax Act.
"ONTARIO SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT DEDUCTIONS'means
the maximum amount deductible by the Corporation in computing its income for
the purposes of the Corporations Tax Act (Ontario), as amended, by reference
to subsection 37(1) of the Federal Tax Act.
"OPTIONS" means options to purchase Common Shares issued pursuant to the
Existing Stock Option Plan.
"OUTSIDE DATE" means May 31, 2004.
"PARTNERSHIP INTEREST TRANSFER AGREEMENT" means the transfer agreement
contemplated by the Plan of Arrangement pursuant to which MDS will transfer
the Labs Limited Partnership Interest to the Corporation and surrender for
cancellation 500,000 Tranche A Warrants and the right to acquire 2,000,000
Tranche B Warrants in consideration for the issuance to MDS of the MDS Class
A Shares and the MDS Class B Shares and the Corporation shall grant to MDS a
right of first refusal in respect of the Labs Limited Partnership Interest
exercisable in the event (i) the Corporation receives a bona fide written
offer from a third party to purchase the Labs Limited Partnership Interest;
(ii) any steps are taken to wind up the Labs Limited Partnership; or (iii)
the Labs Limited Partnership proposes to sell all or substantially all of
its assets, otherwise than in the ordinary course of business.
"PERSON" means any individual, partnership, limited partnership, syndicate,
sole proprietorship, company or corporation, with or without share capital,
unincorporated association, trust, trustee, executor, administrator, or
other legal personal representative, regulatory body or agency, government
or governmental agency, authority or entity, however designated or
constituted.
"PLAN OF ARRANGEMENT" means the plan of arrangement to be proposed under
section 182 of the OBCA, substantially in the form attached as Exhibit 1 to
this Agreement, as amended, modified or supplemented from time to time in
accordance herewith and any order of the Court.
"POLICY Q-27" means Policy Statement Q-27 of the Agence nationale
d'encadement du secteur financier.
"PREMISES" has the meaning set out in subsection (q) of Exhibit 2.
"PROCEEDINGS" has the meaning set out in subsection (l) of Exhibit 2.
"RECIPIENT" has the meaning set out in Section 10.3.
"RULE 61-501" means Rule 61-501 -- Insider Bids, Issuer Bids, Going Private
Transactions and Related Party Transactions of the Ontario Securities
Commission.
"SECURITIES ACT" means the Securities Act (Ontario).
"SHARE CONSOLIDATION" means the consolidation of the Common Shares as
approved by the Shareholders on January 22, 2004.
"SHAREHOLDERS" means the registered holders of Common Shares.
"SECURITYHOLDERS" means Shareholders and Convertible Securityholders.
"SPECIAL MEETING" means the special meeting of the Securityholders,
including any adjournment or postponement thereof, to be convened to
consider and, if thought advisable, to pass the Arrangement Resolution.
"SUBCO" means MDS Laboratory Services Inc., a wholly-owned subsidiary of
MDS, which will hold a 0.01% general partnership interest in the Labs
Limited Partnership upon completion of the Arrangement.
"SUBSIDIARY" means 749235 Ontario Limited, Hemosol (USA) Inc., Hemosol
Research Corporation and any other corporation of which outstanding voting
securities carrying at least 50% of the votes for the election of directors
are, or any general or limited partnership, joint venture or other entity at
least 50% of whose total equity interest is, directly or indirectly, owned
or controlled by, the Corporation, at the date of this Agreement or
hereafter.
D-7
"SUBSTANCE" means any substance or material which under any Environmental
Law is defined as "hazardous", "toxic", "deleterious", "caustic",
"dangerous", a "contaminant", a "pollutant", a "dangerous good", a "waste",
a "source of contamination" or a "source of a pollutant".
"SUPERIOR PROPOSAL" has the meaning set out in subsection 4.3(a).
"SUPPLEMENTAL SUBMISSIONS" means the supplemental submissions to the Canada
Customs & Revenue Agency dated January 14, 2004, January 16, 2004, January
28, 2004, February 3, 2004 and February 5, 2004 and such other supplemental
submissions to the Canada Customs & Revenue Agency prior to the Effective
Time requesting amendments and supplements to the Tax Ruling and an
extension of time within which the proposed transactions are to be
completed.
"TAX" or "TAXES" means all federal, state, provincial, territorial, county,
municipal, local or foreign taxes, duties, imposts, levies, assessments,
tariffs and other charges imposed, assessed or collected by a governmental
authority including, but not limited to, (i) any gross income, net income,
gross receipts, business, royalty, capital, capital gains, goods and
services, value added, severance, stamp, franchise, occupation, premium,
capital stock, sales and use, real property, personal property, ad valorem,
transfer, license, profits, windfall profits, environmental, payroll,
employment, employer health, pension plan, anti-dumping, countervail,
excise, severance, stamp, occupation, or premium tax, (ii) all withholdings
on amounts paid to or by a Person, (iii) all employment insurance premiums,
Canada, Quebec and any other pension plan contributions or premiums, (iv)
any fine, penalty, interest, or addition to tax, (v) any tax imposed,
assessed, or collected or payable pursuant to any tax-sharing agreement or
any other contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee, and (vi) any liability for any
of the foregoing as a transferee, successor, guarantor, or by contract or by
operation of law.
"TAX RETURNS" means all returns, reports, declarations, statements, bills,
schedules, forms or written information of, or in respect of, Taxes which
are required to be filed with, or supplied to, any governmental authority.
"TAX RULING" means the tax ruling issued by Canada Customs & Revenue Agency
dated September 23, 2003 in respect of the transactions contemplated herein
and the supplement thereto dated February 5, 2004 as they may be further
supplemented or amended from time to time.
"TRANCHE A WARRANTS" means the warrants of the Corporation issued to MDS
entitling MDS to acquire, on the due exercise thereof, up to 6,000,000
Common Shares, on the terms and conditions set out in the warrant
certificate dated November 22, 2002.
"TRANCHE B WARRANTS" means warrants of the Corporation to purchase up to
4,000,000 Common Shares to be issued to MDS in certain circumstances on the
terms and conditions set out in the MDS MOU.
"TSX" means the Toronto Stock Exchange.
"UNAUDITED FINANCIAL STATEMENTS" means the unaudited consolidated balance
sheet of the Corporation as at September 30, 2003 and the accompanying
unaudited consolidated statements of loss, deficit and cash flows for the
three-month and nine-month periods then ended.
"UNDEDUCTED BALANCES" means collectively, the undeducted balances of the
following accounts of the Corporation: (i) Federal Non-Capital Losses, (ii)
Ontario Non-Capital Losses, (iii) Federal Scientific Research and
Development Deductions, (iv) Federal Investment Tax Credits, and (v) Ontario
Scientific Research and Experimental Development Deductions.
1.2 CURRENCY
All sums of money which are referred to in this Agreement are expressed in
lawful money of Canada unless otherwise specified.
1.3 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into articles, sections and other portions
and the insertion of headings are for convenience of reference only and shall
not affect the construction or interpretation of this Agreement.
D-8
1.4 NUMBER, ETC.
Unless the subject matter or context requires the contrary, words importing
the singular number only shall include the plural and vice versa and words
importing the use of any gender shall include all genders.
1.5 DATE FOR ANY ACTION
In the event that any date on which any action is required or permitted to
be taken hereunder by any person is not a Business Day, such action shall be
required to be taken on the next succeeding day which is a Business Day.
1.6 REFERENCES
Any reference in this Agreement to a statute includes all regulations made
thereunder, all amendments to such statute in force from time to time and any
statute or regulation that supplements or supersedes such statute or regulation.
Unless the context otherwise requires, any reference in this Agreement to
"transactions contemplated herein" includes, without limiting the generality of
the foregoing, all parts of the Plan of Arrangement.
1.7 ENTIRE AGREEMENT
This Agreement (including the Exhibits hereto, the MDS Disclosure Letter
and the Corporation Disclosure Letter) constitutes the entire agreement between
the parties hereto pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, between the parties hereto with respect to the subject matter hereof.
There are no representations, warranties, covenants or conditions with respect
to the subject matter hereof except as contained or referred to herein.
1.8 ADJUSTMENTS
Any reference herein or in a document referred to herein to a number of
Common Shares or other securities referable to such shares shall be subject to
appropriate adjustment in the event of the Share Consolidation or other event
that results in the reclassification of the Common Shares, adjustment to the
number of Common Shares outstanding or changes the Common Shares into other
shares, securities or other property.
1.9 EXHIBITS
The following are the Exhibits attached to and incorporated into this
Agreement by reference and deemed to be a part hereof:
<Table>
Exhibit 1 -- Plan of Arrangement
Exhibit 2 -- Representations and Warranties of the Corporation
Exhibit 3 -- Representations and Warranties of MDS
Exhibit 4 -- Escrow Agreement Terms
Exhibit 5 -- Blood Products LP Agreement
Exhibit 6 -- Labs Assets
Exhibit 7 -- Labs LP Agreement
Exhibit 8 -- Labs Management Agreement
Exhibit 9 -- New Hemosol Share Conditions
Exhibit 10 -- Consents, Authorizations etc. of the Corporation
Exhibit 11 -- Consents, Authorizations etc. of MDS
Exhibit 12 -- Corporation Indemnity Agreement
Exhibit 13 -- MDS Indemnity Agreement
</Table>
ARTICLE 2
THE ARRANGEMENT
2.1 THE ARRANGEMENT
(a) The Corporation and MDS hereby agree that the Arrangement shall be
implemented in accordance with and subject to the terms and conditions
contained in this Agreement and the Plan of Arrangement.
(b) The Corporation covenants in favour of MDS that the Corporation shall:
D-9
(i) as soon as reasonably practicable and in co-operation with MDS'
counsel, bring an application before the Court in a manner and
form acceptable to MDS, acting reasonably, pursuant to subsection
182(5) of the OBCA for the Interim Order providing for, among
other things, the calling and holding of the Special Meeting as
soon as is reasonably practicable following the date hereof and in
any event to hold the meeting by April 30, 2004 (or such later
date as may be mutually agreed by the parties, acting reasonably);
(ii) convene and hold the Special Meeting for the purpose of having the
Securityholders consider the Arrangement Resolution and the
amendment and restatement of the general by-law of the Corporation
(and, with the prior approval of MDS, acting reasonably, for any
other proper purpose as may be set out in the notice for such
meeting);
(iii) after having called the Special Meeting, not, without the prior
written consent of MDS, acting reasonably, adjourn, postpone or
cancel the Special Meeting except as may be required to meet
quorum requirements or as permitted under this Agreement;
(iv) if the Arrangement Resolution is approved at the Special Meeting by
the Securityholders as required by the Interim Order, bring an
application, as soon as reasonably practicable after the Special
Meeting, before the Court in a manner and form acceptable to MDS,
acting reasonably, pursuant to subsection 182(5) of the OBCA for
the Final Order approving the Arrangement;
(v) if the Final Order is obtained, subject to the satisfaction or
waiver of the conditions set forth in Article 6, as soon as
reasonably practicable thereafter, send Articles of Arrangement and
such other documents as may be required in connection therewith
under the OBCA in a manner and form acceptable to MDS, acting
reasonably, to the Director to give effect to the Arrangement
pursuant to subsection 183(1) of the OBCA; and
(vi) permit MDS and MDS' counsel to review and comment upon drafts of
all material to be filed by the Corporation with the Court, the
Director and the Canadian Securities Administrators in connection
with the Arrangement (including the Circular) prior to finalizing
and filing such materials. The Corporation shall also provide to
MDS and MDS' counsel on a timely basis copies of any notices of
appearance or other court documents served on the Corporation or
its counsel in respect of the application for the Final Order or
any appeal therefrom or any notice received by the Corporation
indicating any intention to appeal the Final Order.
2.2 INTERIM ORDER
The notice of motion for the application referred to in subsection
2.1(b)(i) shall request that the Interim Order provide:
(a) for the class of persons to whom notice is to be provided in
respect of the Arrangement and the Special Meeting and for the
manner in which such notice is to be provided;
(b) that the only requisite approval for the Arrangement Resolution
shall be 66 2/3% of the votes cast on the Arrangement Resolution by
Securityholders present in person or by proxy at the Special
Meeting with Convertible Securityholders and Shareholders voting
together as one class and Convertible Securityholders being
entitled to one vote for each Common Share which they would be
entitled to have issued to them if they exercised all their
Convertible Securities held by them, without reference to any
vesting periods or option price and a majority of the votes cast on
the Arrangement Resolution by Minority Shareholders present in
person or by proxy at the Special Meeting; and
(c) that, in all other respects, the terms, restrictions and conditions
of the by-laws and articles of the Corporation, including quorum
requirements and all other matters, shall apply in respect of the
Special Meeting.
2.3 ARTICLES OF ARRANGEMENT
The Articles of Arrangement shall, with such other matters as are necessary
to effect the Arrangement and all as subject to the provisions of the Plan of
Arrangement, provide for the events described in the Plan of
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Arrangement. The Articles of Arrangement shall be in form satisfactory to MDS
and the Corporation, each acting reasonably.
2.4 VALUE DETERMINATION
As soon as reasonably practicable after the date hereof, the Corporation
and MDS shall determine the following: (i) the value of the Tranche A Warrants
and Tranche B Warrants to be surrendered for cancellation by MDS under the Plan
of Arrangement; and (ii) the allocation of the value of the Blood Products
Assets for purposes of the election under subsection 97(2) of the Tax Act (each,
an "ASSET VALUE").
If the Corporation and MDS cannot agree on any Asset Value by March 31,
2004, the Corporation and MDS shall appoint a mutually acceptable accounting
firm or investment banking firm that is independent of each of the Corporation
and MDS (an "INDEPENDENT VALUATOR") to determine the Asset Value as promptly as
practicable and in any event within 30 days after such appointment. The
Independent Valuator shall be instructed to provide the Corporation and MDS with
full and open access to the working papers and determinations made and prepared
by the Independent Valuator. The fees of such Independent Valuator shall be
borne equally by the Corporation and MDS. The parties shall co-operate with the
Independent Valuator and provide it with the information it requests in order to
make its determination. The decision of the Independent Valuator shall be
binding upon the parties hereto.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation hereby represents and warrants to MDS as to those matters
set out in Exhibit 2 and acknowledges that MDS is relying upon these
representations and warranties in connection with the entering into of this
Agreement and the completion of the transactions contemplated by this Agreement.
3.2 REPRESENTATIONS AND WARRANTIES OF MDS
MDS hereby represents and warrants to the Corporation as to those matters
set out in Exhibit 3 and acknowledges that the Corporation is relying upon these
representations and warranties in connection with the entering into of this
Agreement and the completion of the transactions contemplated by this Agreement.
ARTICLE 4
COVENANTS OF THE CORPORATION
4.1 CONDUCT OF BUSINESS
Prior to the Effective Time, unless MDS otherwise agrees in writing or as
otherwise expressly permitted by this Agreement, the Corporation covenants as
follows:
(a) The Corporation shall, and shall cause each of its Subsidiaries to,
conduct its and their respective business only in, not take any action
except in, and maintain their respective facilities in the usual,
ordinary and regular course of business and consistent with past
practice (which includes, for greater certainty, activities in
connection with contract manufacturing at the Hemolink Building as
previously publicly disclosed by the Corporation).
(b) The Corporation shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, do or permit to occur any of
the following (provided that the following shall not limit the ability
of the Corporation to comply with any existing obligations which have
been publicly disclosed or otherwise set forth in the Corporation
Disclosure Letter or to complete any transaction contemplated in this
Agreement):
(i) issue, sell, pledge, lease, dispose of or encumber, or agree to
issue, sell, pledge, lease, dispose of or encumber any shares of,
or any options, warrants, conversion privileges or rights of any
kind to acquire any shares of, the Corporation or any of its
Subsidiaries, other than (x) pursuant to the exercise of stock
options, share purchase rights or other securities outstanding on
the date hereof and (y) the issue of up to 19,041,057 Common
Shares (or securities convertible or exchangeable into Common
Shares), which includes, for greater certainty, 1,000,000 Common
Shares to be issued to ProMetic BioSciences Ltd. as previously
publicly disclosed by the Corporation;
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(ii) amend or propose to amend its articles or by-laws other than in
respect of the Share Consolidation and as contemplated by
subsection 2.1(b)(ii);
(iii) declare, set aside or pay any dividend or other distribution
payable in cash, stock, property or otherwise with respect to any
securities of the Corporation;
(iv) redeem, purchase or offer to purchase any shares or other
securities of the Corporation or any of its Subsidiaries;
(v) reorganize, amalgamate or merge the Corporation or any of its
Subsidiaries with any other person, corporation, partnership or
other business organization;
(vi) reduce the stated capital of the Corporation or any of its
Subsidiaries;
(vii) acquire or agree to acquire (by merger, amalgamation, acquisition
of stock or assets or otherwise) any corporation, partnership or
other business organization or division, or acquire or agree to
acquire any assets with aggregate value greater than $500,000;
(viii) dispose of or agree to dispose of (by merger, amalgamation,
acquisition of stock or assets or otherwise) any corporation,
partnership or other business organization or division, or
dispose of, pledge, lease or encumber or agree to dispose of,
pledge, lease or encumber any assets with aggregate value greater
than $500,000; or
(ix) incur or commit to incur any indebtedness for borrowed money or
issue any debt securities, or agree to give, be a party or be bound
by any guarantee of indebtedness, indemnity or suretyship or other
obligations of any person, or become contingently responsible for
such indemnity or suretyship or obligations in an aggregate amount
greater than $500,000.
(c) The Corporation shall use its reasonable efforts to cause its current
insurance (or re-insurance) policies not to be cancelled or terminated
or any of the coverage thereunder to lapse, unless simultaneously with
such termination, cancellation or lapse, replacement policies
underwritten by insurance or re-insurance companies of nationally
recognized standing providing coverage equal to or greater than the
coverage under the cancelled, terminated or lapsed policies are in
full force and effect.
(d) The Corporation shall not and shall cause each of its Subsidiaries to
not terminate the services of any of their key officers and employees
if such termination would result in the payment of severance,
parachute, bonus or other compensation or result in a material
increase in liability to the Corporation.
(e) The Corporation shall not settle or compromise any claim brought by
any present, former or purported holder of any securities of the
Corporation in connection with the transactions contemplated by this
Agreement.
(f) The Corporation shall not take any action or enter into any agreement
that would be inconsistent with the Tax Ruling or the Supplemental
Submissions, that would materially reduce the Undeducted Balances or
that would result in a material impairment in or materially adversely
affect the ability of the Corporation to utilize its Undeducted
Balances after the Effective Time as contemplated by the Tax Ruling.
4.2 SUPPORT COVENANT OF THE CORPORATION
The Corporation covenants as follows:
(a) The Board shall recommend that Securityholders vote in favour of the
Arrangement Resolution and shall not modify, amend or withdraw such
recommendation or resolve to modify, amend or withdraw such
recommendation except as permitted by this Agreement.
(b) The Corporation shall prepare the Circular which shall include, among
other things, a copy of the Plan of Arrangement and any other
documents required by the Securities Act or other Applicable Laws and
the Corporation shall mail the Circular and any other documentation
required in connection with the Special Meeting to Securityholders no
later than March 30, 2004 (or such later date as may be mutually
agreed by the parties, acting reasonably) and, subject to section
2.1(b)(iii), shall hold and convene the Special Meeting within 35 days
after the date of such mailing (or such longer period as may be agreed
by MDS, acting reasonably). Notwithstanding the foregoing, the
Corporation shall permit MDS and MDS' counsel to review and comment
upon drafts of the Circular prior to finalizing and filing provided
that
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MDS acknowledges and agrees that whether or not the comments are
appropriate will be determined by the Corporation, acting reasonably.
(c) The Corporation shall prepare and deliver to the Securityholders the
Circular in accordance with all Applicable Laws. With respect to the
portions of the Circular relating solely to MDS and the Labs Business
(the "LABS DISCLOSURE"), the Corporation shall rely entirely upon the
information provided by or on behalf of MDS expressly for the purpose
of inclusion in the Circular pursuant to Section 5.1(c), without
having to make or rely upon any independent inquiries as to the
accuracy or completeness thereof, and shall have no further
obligation, responsibility or liability for its accuracy, completeness
or correctness in that regard. The Corporation covenants with and
represents and warrants to MDS that the information to be contained in
the Circular other than the Labs Disclosure (including any information
incorporated therein by reference) will not contain a
misrepresentation (as such term is defined in the Securities Act).
4.3 NON-SOLICITATION
(a) The Corporation and its Subsidiaries shall not, directly or
indirectly, through any officer, director, employee, investment
broker, representative, consultant or agent of the Corporation or any
of its Subsidiaries, or otherwise, solicit, initiate or encourage
(including by way of furnishing information or entering into any form
of agreement, arrangement or understanding) any inquiries or proposals
regarding any merger, amalgamation, arrangement, restructuring,
take-over bid, sale or purchase of substantial assets (including
without limitation tax carryforward balances), sale or purchase of
treasury shares, any equity interest or rights or any other interests
therein or thereto (other than as contemplated by subsection
4.1(b)(i)) or similar transactions or business combinations,
reorganizations or recapitalizations including without limitation any
transaction that would be inconsistent with the Tax Ruling (any of the
foregoing inquiries or proposals being referred to herein as an
"ACQUISITION PROPOSAL"), or participate in any discussions or
negotiations regarding, or furnish to any person any information with
respect to, or otherwise co-operate in any way with, or assist or
participate in, facilitate or encourage, any effort or attempt by any
other person to do or seek to do any of the foregoing, provided
nothing contained in this subsection 4.3(a) or in any other provision
of this Agreement (including without limitation Section 4.2) shall
prevent the Board or the Corporation from responding to, considering,
negotiating and entering into agreements relating to an unsolicited
bona fide written Acquisition Proposal that did not result from a
breach of this Section 4.3 and which the Board determines in good
faith and in the proper discharge of its fiduciary duties (after
consultation with its financial and legal advisors and after receiving
advice from outside counsel to the effect that to take such action
would be a proper exercise of the directors' fiduciary duties under
Applicable Laws) would, if consummated in accordance with its terms,
result in a transaction more favourable to the holders of Common
Shares generally (without taking into account any benefits that MDS
and its associates and affiliates may receive under this Agreement)
than the transaction contemplated by this Agreement (any such
Acquisition Proposal being referred to herein as a "SUPERIOR
PROPOSAL").
(b) The Corporation shall not release any third party from the prohibition
from taking steps to initiate an Acquisition Proposal contained in any
confidentiality agreement in favour of the Corporation unless it is
determined by the Board that the third party has made a Superior
Proposal.
(c) The Corporation shall immediately cease and cause to be terminated any
existing discussions or negotiations with any parties (other than MDS)
with respect to any potential Acquisition Proposal and in that regard,
the Corporation hereby confirms that there is no outstanding
Acquisition Proposal that has not expired or terminated. The
Corporation shall immediately notify MDS of any future Acquisition
Proposal or of any request for non-public information relating to the
Corporation or any of its Subsidiaries in connection with such an
Acquisition Proposal or for access to the properties, books or records
of the Corporation or any of its Subsidiaries by any person or entity
that informs any officer or director of the Corporation or such
Subsidiary that it is considering making, or has made, an Acquisition
Proposal. Such notice to MDS shall be made, from time to time, first
immediately orally and then promptly in writing and shall indicate all
such details of the proposal, inquiry or contact known to such person
as MDS may reasonably request, including the identity of the person
making such proposal, inquiry or contact and all material terms
thereof.
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(d) If the Board receives a request for non-public information from a
party who proposes to the Corporation a bona fide written Acquisition
Proposal (details of which have been provided to MDS pursuant to
subsection (c) hereof) and the Board determines that such proposal is
a Superior Proposal then, and only in such case, the Corporation may
provide such party with access to non-public information regarding the
Corporation and its Subsidiaries, provided such party has either
previously entered or then enters into a confidentiality agreement
substantially similar and not less onerous to that then in effect
between the Corporation and MDS. The Corporation agrees to promptly
send a copy of any such confidentiality agreement to MDS.
(e) The Corporation shall ensure that the officers, directors and
employees of the Corporation and its Subsidiaries and any agents or
other advisors or representatives retained by the Corporation are
aware of the provisions of this Section 4.3, and the Corporation shall
be responsible for any breach of this Section 4.3 by such parties.
4.4 OTHER COVENANTS
(a) The Corporation covenants to perform all obligations required to be
performed by it under this Agreement and to do all such other acts and
things as may be necessary in order to consummate and make effective,
as soon as reasonably practicable, the transactions contemplated by
this Agreement and, without limiting the generality of the foregoing,
to:
(i) use all commercially reasonable efforts to obtain the approval of
Securityholders to the Arrangement Resolution at the Special
Meeting;
(ii) apply for and use all commercially reasonable efforts to obtain
the Interim Order and the Final Order;
(iii) effect all registrations, filings and submissions of information
required by all governmental entities from the Corporation, any of
its Subsidiaries, New Hemosol and the Blood Products Limited
Partnership as are necessary to consummate the transactions
contemplated herein and in the Plan of Arrangement (including,
without limitation, those listed on Exhibit 10); and
(iv) apply for and use all commercially reasonable efforts (in
co-operation with MDS) to obtain prior to the Effective Date all
necessary waivers, consents, authorizations and approvals,
regulatory or otherwise, as are required to consummate the
transactions contemplated herein and in the Plan of Arrangement
(including, without limitation, those listed on Exhibit 10),
without giving rise to any rights of termination, cancellation or
acceleration, contained in any agreement, permit or licence which
is material to the Corporation and its Subsidiaries on a
consolidated basis.
(b) The Corporation shall promptly notify MDS in writing of any matter,
event or state of facts which comes to its attention which:
(i) renders or might reasonably render any representation or warranty
of the Corporation contained in this Agreement, if made on or as
of the date of such matter or event or the Effective Date, untrue
or inaccurate in any material respect;
(ii) constitutes or might reasonably constitute a Material Adverse
Effect in respect of the Corporation;
(iii) constitutes or might reasonably constitute or result in a breach
by the Corporation of any covenant or agreement contained in this
Agreement; or
(iv) would result in the inability of the Corporation to satisfy a
condition or agreement to be satisfied by it under this Agreement
prior to the Effective Time.
(c) On or prior to the Effective Time, the Corporation shall:
(i) file articles of incorporation of New Hemosol authorizing an
unlimited number of New Hemosol Shares having the New Hemosol
Share Conditions, cause New Hemosol to issue one share to the
Corporation, and cause the board of directors of New Hemosol to
consist, at MDS' option, of not less than two directors that are
related to MDS;
(ii) file the Articles of Arrangement;
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(iii) obtain from the Bank, and use its commercially reasonable efforts
to obtain from each other secured creditor of the Corporation, a
release of all registered security interests against the
Corporation and its assets effective the Effective Time;
(iv) provide MDS with drafts of the Corporation's Tax Returns in respect
of the year ended December 31, 2002 and incorporate therein MDS'
reasonable comments thereon and file such returns;
(v) the Corporation shall, and shall cause Newco and the Blood Products
Partnership to, co-operate with MDS to find the most commercially
reasonable method for the parties to purchase insurance to insure
the Corporation for any liability arising from any matters, events
or circumstances preceding the Effective Time. If it is determined
that the most commercially reasonable method to purchase the
insurance is to have the Corporation added as an additional insured
to the Blood Products Partnership's insurance policy, then the
Corporation shall reimburse the Blood Products Partnership for the
cost of being added as an additional insured;
(vi) lend $6,000 to New Hemosol to enable it to purchase its general
partnership interest in the Blood Products Limited Partnership;
(vii) enter into the Blood Products LP Agreement, as an 8.87% limited
partner and a 91.12% general partner, and cause New Hemosol to
enter into the Blood Products LP Agreement, as a 0.01% general
partner, and execute all documents and take all such other steps
and cause New Hemosol to execute all documents and take all such
other steps required for the formation of the Blood Products
Limited Partnership;
(viii) enter into the Blood Products Contribution Agreement with the
Blood Products Limited Partnership and cause the Blood Products
Limited Partnership to enter into the Blood Products Contribution
Agreement and execute all documents and take all such other steps
required and cause the Blood Products Limited Partnership to
execute all documents and take all such other steps required for
(A) the transfer of the Blood Products Assets to the Blood
Products Limited Partnership; (B) the assumption by the Blood
Products Limited Partnership of the Blood Products Liabilities;
(C) the employment by the Blood Products Limited Partnership or
New Hemosol of the employees of the Corporation, including
without limitation, requesting each employee to consent to such
change in employment and to the treatment of its Options as
contemplated by the Plan of Arrangement and waive, if applicable,
any rights to severance or other payments in the event of such
change or the transactions contemplated herein; (D) the issuance
by the Blood Products Limited Partnership to the Corporation of
an 8.87% limited partnership and 91.12% general partnership
interest, respectively in the Blood Products Limited Partnership;
and (E) the execution and filing of tax elections under
subsection 97(2) of the Federal Tax Act or the analogous
provisions of any applicable provincial taxing statute, in
respect of the Blood Products Assets transferred to the Blood
Products Limited Partnership with elected amounts equal to the
cost amount of the particular asset for purposes of the Federal
Tax Act, or the provincial taxing statute, as the case may be,
except for property which is eligible capital property where the
elected amount shall be equal to the fair market value of such
property, as determined by MDS and the Corporation;
(ix) cause the Blood Products Limited Partnership to enter into the
Blood Products Security Agreements and to execute all such other
documents and take such steps required to grant the security
interests in respect of all of its assets to the Bank in respect of
the Bank Loan;
(x) make such applications or take such other steps as are required so
that the New Hemosol Shares, the Class A Common Shares, the Class B
Non-Voting Shares and Class C Preferred Shares will not be subject
to any statutory hold period under applicable Canadian laws (except
in respect of "control blocks") and to seek relevant exemptions
from the prospectus and registration requirements in respect of the
distributions of securities contemplated herein and in the Plan of
Arrangement;
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(xi) apply to, and seek confirmation from, the TSX and NASDAQ of the
delisting of the Common Shares and the listing and posting for
trading or quotation, as the case may be, of the New Hemosol Shares
on the TSX and the NASDAQ effective as of the Effective Time;
(xii) amend the Tranche A Warrants at the Effective Time so that the
aggregate number of Common Shares to which MDS is entitled
thereunder shall be reduced by 500,000 with such reduction to be
effected by reducing by 50% MDS' entitlement to acquire Common
Shares which entitlement has vested (or will vest) on February 22,
2004, March 22, 2004 and April 22, 2004;
(xiii) redeem all Class C Preferred Shares held by New Hemosol at the
Effective Time at their aggregate redemption price and cause New
Hemosol to assume the obligations under the Convertible
Securities, other than Options, as if such Convertible Securities
were a right to acquire New Hemosol Shares (other than a
reduction of the exercise price of the Convertible Security by
$0.04) in exchange for the transfer to New Hemosol at fair market
value of the Corporation's 91.12% general partnership interest in
the Blood Products Limited Partnership and $16,000,000;
(xiv) terminate the MDS MOU and cause New Hemosol to enter into the New
Hemosol MOU;
(xv) cause New Hemosol to enter into the Escrow Agreement;
(xvi) enter into the Partnership Interest Transfer Agreement; and
(xvii) execute all other documents and take all other steps and cause
New Hemosol and the Blood Products Limited Partnership to
execute all other documents and take all other steps as may be
required to carry out the foregoing and the transactions
contemplated herein, all such documents to be in the form and
substance satisfactory to MDS, acting reasonably.
ARTICLE 5
MDS
5.1 COVENANTS OF MDS
(a) MDS hereby covenants and agrees to perform all obligations required to
be performed by it under this Agreement and to do all such other acts
and things as may be necessary in order to consummate and make
effective, as soon as reasonably practicable, the transactions
contemplated by this Agreement and, without limiting the generality of
the foregoing, to:
(i) effect all registrations, filings and submissions of information
required by all governmental entities from MDS and the Labs
Limited Partnership as are necessary to consummate the
transactions contemplated herein and in the Plan of Arrangement
(including, without limitation, those listed on Exhibit 11
hereto);
(ii) apply for and use all reasonable efforts (in co-operation with the
Corporation) to obtain prior to the Effective Date all necessary
waivers, consents, authorizations and approvals, regulatory or
otherwise, as are required to consummate the transactions
contemplated herein and in the Plan of Arrangement (including,
without limitation, those listed on Exhibit 11 hereto); and
(iii) vote the Common Shares held by it and cause its Subsidiaries to
vote the Common Shares held by them in favour of the Arrangement
Resolution.
(b) MDS shall promptly notify the Corporation in writing of any matter,
event or state of facts which comes to its attention which:
(i) renders or might reasonably render any representation or warranty
of MDS contained in this Agreement, if made on or as of the date
of such matter or event or the Effective Date, untrue or
inaccurate in any material respect;
(ii) constitutes or might reasonably constitute a Material Adverse
Effect in respect of the Labs Business;
(iii) constitutes or might reasonably constitute or result in a breach
by MDS of any covenant or agreement contained in this Agreement;
or
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(iv) would result in the inability of MDS to satisfy a condition or
agreement to be satisfied by it under this Agreement prior to the
Effective Time.
(c) MDS shall furnish, on a timely basis, all such information regarding
MDS and the Labs Business as may be required to be included in the
Circular under the requirements of Applicable Law. MDS covenants with
and represents and warrants to the Corporation that the information
furnished by it regarding MDS and the Labs Business for inclusion in
the Circular will not contain a misrepresentation (as such term is
defined in the Securities Act).
(d) On or prior to the Effective Time, MDS shall:
(i) lend Subco $50,000 to enable it to purchase its general
partnership interest in the Labs Limited Partnership;
(ii) enter into the Labs LP Agreement and cause Subco to enter into the
Labs LP Agreement and execute all documents and take all steps
required for, and cause Subco to execute all documents and take
all steps required for, the formation of the Labs Limited
Partnership;
(iii) enter into the Labs Contribution Agreement with the Labs Limited
Partnership and cause the Labs Limited Partnership to enter into
the Labs Contribution Agreement and execute all such documents and
take all such other steps required to transfer the Labs Assets to
the Labs Limited Partnership;
(iv) enter into and cause the Labs Limited Partnership to enter into the
Labs Management Agreement;
(v) lend $16,000,000 to the Labs Limited Partnership and cause the Labs
Limited Partnership to lend $16,000,000 to the Corporation, in
accordance with the terms of the Labs Limited Partnership
Agreement;
(vi) enter into the Partnership Interest Transfer Agreement;
(vii) subject to the release of MDS under the MDS Guarantee by the Bank,
enter into a guarantee (the "BPP GUARANTEE") substantially similar
to the MDS Guarantee pursuant to which MDS will guarantee the
Blood Products Limited Partnership's obligation under the Bank
Loan after the Effective Time; and
(viii) execute all other documents and take all other steps and cause
Subco and the Labs Limited Partnership to execute all other
documents and take all other steps as required to carry out the
foregoing and the transactions contemplated herein, such
documents to be in form and substance satisfactory to the
Corporation, acting reasonably.
ARTICLE 6
CONDITIONS
6.1 MUTUAL CONDITIONS PRECEDENT
The respective obligations of the Corporation and MDS to complete the
transactions contemplated hereby are subject to the fulfillment of the following
conditions on or before the Effective Date or such other time as is specified
below:
(a) the Interim Order shall have been granted in form and substance
satisfactory to the Corporation and MDS, acting reasonably, and shall
not have been set aside or modified in a manner which is not
acceptable to such parties, acting reasonably, on appeal or otherwise;
(b) any conditions in addition to those set out in this Section 6.1 which
may be imposed by the Interim Order shall have been satisfied;
(c) the Arrangement Resolution shall have been approved by the
Securityholders at the Special Meeting in accordance with the Interim
Order;
(d) the Final Order shall have been granted in form and substance
satisfactory to the Corporation and MDS, acting reasonably, and shall
not have been set aside or modified in a manner which is not
acceptable to such parties, acting reasonably, on appeal or otherwise;
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(e) all other consents, orders, authorizations, approvals and waivers of
or from governmental entities, including regulatory and judicial
approvals and orders, required for the completion of the transactions
contemplated herein shall have been obtained or received from
applicable governmental entities having jurisdiction in the
circumstances, and all other applicable regulatory requirements and
conditions shall have been complied with including without limitation
those regulatory requirements and conditions listed in Exhibits 10 and
11 hereto;
(f) all consents, orders, authorizations, approvals and waivers listed in
Part A of Exhibit 10 and in Exhibit 11 (other than as referred to in
paragraph (e) above) shall have been obtained;
(g) there shall not be in force any order or decree restraining or
enjoining the consummation of the transactions contemplated under this
Agreement or under the Plan of Arrangement and there shall be no
proceeding, whether of a judicial or administrative nature or
otherwise brought by a governmental entity that relates to or results
from the transactions contemplated herein that would, if successful,
result in an order or ruling that would preclude completion of the
transactions contemplated under this Agreement or under the Plan of
Arrangement in accordance with the terms and conditions hereof or
thereof or would otherwise be inconsistent with any approvals which
have been obtained; and
(h) this Agreement shall not have been terminated pursuant to Article 8.
The foregoing conditions are for the mutual benefit of the Corporation and
MDS and may be waived, in whole or in part, by the Corporation and MDS at any
time.
6.2 ADDITIONAL CONDITIONS IN FAVOUR OF THE CORPORATION
The obligation of the Corporation to complete the transactions contemplated
herein is subject to the fulfilment of the following conditions on or before the
Effective Date or such other time as specified below:
(a) the representations and warranties made by MDS in this Agreement shall
be true and correct in all material respects as of the Effective Date
as if made on and as of such date (except to the extent such
representations and warranties are qualified by materiality, in which
event such representations and warranties shall be true and correct in
all respects and to the extent such representations and warranties
speak as of an earlier date, in which event such representations and
warranties shall be true and correct as of such earlier date or except
as affected by transactions contemplated or permitted by this
Agreement), and MDS shall have provided to the Corporation the
certificate of any one senior officer of MDS certifying such accuracy
as at the Effective Date;
(b) all covenants of MDS hereunder to be performed on or before the
Effective Date shall have been duly performed by MDS in all material
respects and MDS shall have provided to the Corporation the
certificate of any one senior officer of MDS certifying the foregoing
on the Effective Date;
(c) subject to the release by the Bank of MDS under the MDS Guarantee, MDS
shall have entered into the BPP Guarantee;
(d) from the date hereof up to and including the Effective Date, there
shall not have occurred, developed or arisen or come into effect or
existence any condition, event or development which in the reasonable
judgment of the Corporation has, or is reasonably likely to have, a
Material Adverse Effect on the Labs Business; and
(e) the satisfaction of the Corporation, acting reasonably, that all
appropriate actions have been completed by MDS, Subco and the Labs
Limited Partnership to carry out the transactions contemplated herein
including without limitation those actions set out in Section 5.1
hereof and all requisite documents and agreements in a form
satisfactory to the Corporation, acting reasonably, have been executed
by MDS, Subco and the Labs Limited Partnership to carry out the
transactions contemplated herein.
The foregoing conditions precedent are for the exclusive benefit of the
Corporation and may be waived, in whole or in part, by the Corporation in
writing at any time.
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6.3 ADDITIONAL CONDITIONS IN FAVOUR OF MDS
The obligation of MDS to complete the transactions contemplated herein is
subject to the fulfilment of the following conditions on or before the Effective
Date or such other time as specified below:
(a) the representations and warranties made by the Corporation in this
Agreement shall be true and correct in all material respects as of the
Effective Date as if made on and as of such date (except to the extent
such representations and warranties are qualified by materiality, in
which event such representations and warranties shall be true and
correct in all respects and to the extent such representations and
warranties speak as of an earlier date, in which event such
representations and warranties shall be true and correct as of such
earlier date or except as affected by transactions contemplated or
permitted by this Agreement), and the Corporation shall have provided
to MDS the certificate of any one senior officer of the Corporation
certifying such accuracy as at the Effective Date;
(b) all covenants of the Corporation hereunder to be performed on or
before the Effective Date shall have been duly performed by the
Corporation in all material respects and the Corporation shall have
provided to MDS the certificate of any one senior officer of the
Corporation certifying the foregoing on the Effective Date;
(c) from the date hereof up to and including the Effective Date, there
shall not have occurred, developed or arisen or come into effect or
existence any condition, event or development which in the reasonable
judgment of MDS has, or is reasonably likely to have, a Material
Adverse Effect on the Corporation;
(d) the Corporation shall have filed Tax Returns in respect of the year
ended December 31, 2002 with amendments as appropriate to correct and
adjust prior filings;
(e) New Hemosol shall have been incorporated with the New Hemosol Shares
having the terms and conditions in the New Hemosol Share Conditions;
(f) there shall not be any change to the Plan of Arrangement that would
result in any Convertible Securities and Options being issued and
outstanding upon completion of the Arrangement;
(g) there shall not be any change, condition, event or development in
respect of the Corporation or the Business that would result in any
material impairment in or materially adversely affect the ability of
the Corporation to utilize its Undeducted Balances after the Effective
Time as contemplated in the Tax Ruling;
(h) MDS has obtained any amendments or supplements to the Tax Ruling
deemed necessary by its counsel or financial advisors in order to
implement the Plan of Arrangement and this Agreement and to allow the
Corporation to utilize the Undeducted Balances of the Corporation
after the Effective Time as contemplated in the Tax Ruling;
(i) 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 result in any material impairment in or materially adversely
affect the Tax Ruling or the ability of the Corporation to utilize
its Undeducted Balances after the Effective Time as contemplated by
the Tax Ruling or result in a material adverse change in the tax
treatment on any dividends to be received by MDS as a shareholder of
the Corporation or otherwise reduce (otherwise than as a consequence
of a general reduction in income tax rates) the benefit to the
Corporation or MDS of the Corporation utilizing the Undeducted
Balances of the Corporation;
(j) the Blood Products Limited Partnership and New Hemosol shall have
executed the Corporation Indemnity Agreement and MDS Indemnity
Agreement, respectively; and
(k) the satisfaction of MDS, acting reasonably, that all appropriate
actions have been completed by the Corporation, New Hemosol and the
Blood Products Limited Partnership including without limitation those
actions set out in Section 4.4 hereof and all requisite documents and
agreements in a form satisfactory to MDS, acting reasonably, have been
executed and delivered by the Corporation, New Hemosol and the Blood
Products Limited Partnership to carry out the transactions
contemplated herein.
The foregoing conditions precedent are for the exclusive benefit of MDS and
may be waived, in whole or in part, by MDS in writing at any time.
D-19
6.4 MERGER OF CONDITIONS
The conditions set out in Sections 6.1, 6.2 and 6.3 shall be conclusively
deemed to have been satisfied, waived or released upon the filing of Articles of
Arrangement as contemplated by this Agreement with the agreement of the
Corporation and MDS and the issuance of a certificate of arrangement in respect
thereof under the OBCA.
ARTICLE 7
EXPENSE REIMBURSEMENT
7.1 MDS EXPENSE REIMBURSEMENT
In the event that:
(a) this Agreement is terminated by MDS pursuant to subsections 8.1(c) or
8.1(d);
(b) this Agreement is terminated by the Corporation pursuant to subsection
8.1(e), or
(c) this Agreement is terminated pursuant to subsection 8.1(f) provided
that a condition set out in Section 6.3, other than a condition set
out in subsection 6.3(c), (f), (g), (h) or (i), is not satisfied or
the condition set out in subsection 6.1(f) (to the extent that such
condition relates to a consent, order, authorization, approval or
waiver required to be obtained by the Corporation) is not satisfied,
the Corporation shall pay to MDS in respect of expenses incurred by MDS in
connection with matters related to this Agreement within two Business Days
following the termination of this Agreement, an amount equal to $1,000,000 in
immediately available funds to an account designated by MDS. The Corporation
acknowledges that this amount is a genuine pre-estimate of damages which MDS
will suffer or incur as a result of any of the foregoing termination events and
are not penalties. Any obligation to make a payment under this section shall
survive the termination of this Agreement.
7.2 CORPORATION EXPENSE REIMBURSEMENT
In the event that:
(a) this Agreement is terminated by the Corporation pursuant to subsection
8.1(d);
(b) this Agreement is terminated pursuant to subsection 8.1(f) provided
that a condition set out in Section 6.2 other than a condition set out
in subsection 6.2(d) is not satisfied or the condition set out in
subsection 6.1(f) (to the extent that such condition relates to a
consent, order, authorization, approval or waiver required to be
obtained by MDS) is not satisfied; or
(c) this Agreement is terminated by MDS pursuant to subsection 8.1(h),
MDS shall pay to the Corporation in respect of expenses incurred by the
Corporation in connection with matters related to this Agreement within two
Business Days following the termination of this Agreement, an amount equal to
$500,000 in immediately available funds to an account designated by the
Corporation. MDS acknowledges that this amount is a genuine pre-estimate of
damages which the Corporation will suffer or incur as a result of the foregoing
termination events and are not penalties. Any obligation to make a payment under
this section shall survive the termination of this Agreement.
ARTICLE 8
TERMINATION
8.1 TERMINATION
This Agreement may be terminated at any time prior to the Effective Date:
(a) by mutual written consent of the parties hereto;
(b) by MDS or the Corporation, not less than seven days after the Special
Meeting, if the Securityholders do not vote to approve the Arrangement
Resolution at the Special Meeting;
(c) by MDS if: (i) the Board shall have (A) modified or amended in a
manner adverse to MDS or withdrawn, or resolved to modify or amend in
a manner adverse to MDS or withdraw, its recommendation that the
Securityholders approve the Arrangement, or (B) approved or
recommended
D-20
any Superior Proposal; or (ii) the Corporation has entered into a
binding agreement with respect to a Superior Proposal;
(d) by MDS or the Corporation if the other party is in breach of any of
its representations or warranties (in any material respect or where
any representation or warranty is qualified by materiality, in any
respect) or in breach of any covenants under this Agreement and such
breach is not curable, or if curable, is not cured within three days
after notice of the breach has been received by such other party;
(e) by the Corporation upon the determination by the Corporation, after
the conclusion of the process set out in Section 4.3, that an
Acquisition Proposal constitutes a Superior Proposal;
(f) by MDS or the Corporation if the Effective Date does not occur on or
prior to the Outside Date;
(g) by MDS or the Corporation if the Arrangement is illegal or otherwise
prohibited by law or if any final and non-appealable judgment,
injunction, order or decree of a court or regulatory authority is
issued that prohibits MDS or the Corporation from proceeding with or
completing the Arrangement; or
(h) by MDS if the Canada Customs & Revenue Agency has refused to issue an
amendment or supplement to the Tax Ruling required to satisfy the
condition in subsection 6.3(h) or there is an enactment, promulgation
or announcement such that the condition set out in subsection 6.3(i)
cannot be satisfied.
In the event of any such termination, subject to the payment required by
Sections 7.1 and 7.2, each party hereto shall be deemed to have released,
remised and forever discharged the other party hereto in respect of any and all
claims arising in respect of this Agreement, provided that neither the
termination of this Agreement nor anything contained in this Section 8.1 shall
(i) relieve a party from any liability for any wilful breach, fraud or wilful
misfeasance by it or (ii) preclude a party from seeking injunctive relief to
restrain any breach or threatened breach of a covenant set forth in this
Agreement or otherwise to obtain specific performance of any act, covenant or
agreement set forth in or contemplated by this Agreement, provided such party
does not seek or has not sought an expense reimbursement pursuant to Section 7.1
or 7.2 hereof.
ARTICLE 9
AMENDMENT
9.1 AMENDMENT
This Agreement may, at any time and from time to time, before and after the
holding of the Special Meeting but not later than the Effective Date, be
amended, modified and/or supplemented by written agreement of the parties hereto
(or in the case of a waiver, by written instrument of the party giving the
waiver) without, subject to Applicable Law, further notice to or authorization
on the part of Shareholders. Without limiting the generality of the foregoing,
any such amendment, modification or supplement may:
(a) change the time for performance of any of the obligations or acts of
the parties hereto;
(b) waive any inaccuracies or modify any representation or warranty
contained herein or in any document to be delivered pursuant hereto;
(c) waive compliance with or modify any of the covenants contained herein
or in any document to be delivered pursuant hereto; or
(d) waive or modify performance of any of the obligations or conditions
precedent of the parties hereto.
9.2 PUBLIC ANNOUNCEMENTS
All press releases or other public written communications of any sort by
either of the parties hereto relating to this Agreement or the Arrangement and
the method of release for publication thereof will be provided for prior review
and comment by the other party hereto. Each party will deal expeditiously with a
request for comments on such written communication provided that the party
issuing such written communication shall not be delayed if to do so would be
contrary to any legal or regulatory requirement.
D-21
ARTICLE 10
GENERAL PROVISIONS
10.1 NOTICES
All notices and other communications hereunder shall be in writing and
shall be delivered to the parties at the following addresses or sent by telecopy
at the following telecopier numbers or at such other addresses or telecopier
numbers as shall be specified by the parties by like notice:
(a) if to the Corporation:
2585 Meadowpine Blvd.
Mississauga, Ontario
L5N 8H9
Attention: Lee Hartwell
Facsimile No.: 905 286 0021
with a copy to:
Davies Ward Phillips & Vineberg LLP
P.O. Box 63
Suite 4400
1 First Canadian Place
Toronto, Ontario
M5X 1B1
Attention: Arthur Shiff
Facsimile No.: 416 863 0871
(b) if to MDS:
100 International Boulevard
Toronto, Ontario
M9W 6J6
Attention: James A.H. Garner
Facsimile No.: 416 213 4222
with a copy to:
Fasken Martineau DuMoulin LLP
Suite 4200
TD Bank Tower
Toronto Dominion Centre
Toronto, Ontario
M5K 1N6
Attention: Richard J. Steinberg
Facsimile No.: 416 364 7813
The date of receipt of any such notice shall be deemed to be the date of
delivery thereof or, in the case of notice sent by telecopy, the date of
successful transmission thereof (unless transmission is received after normal
business hours, in which case the date of receipt shall be deemed to be the next
Business Day).
10.2 TERMINATION OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the parties contained herein shall
expire with, and be terminated and extinguished upon, the filing of the Articles
of Arrangement under the OBCA to give effect to the Arrangement.
10.3 CONFIDENTIALITY
Each of MDS and the Corporation (each a "RECIPIENT") covenants and agrees
to keep all information provided or made available to it in connection with this
Agreement and the Plan of Arrangement (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
D-22
furnish the Information only to those of its representatives who need to know
the Information to carry out the transactions contemplated herein 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 Section 10.3. This Section 10.3
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.
10.4 APPLICABLE LAW
This Agreement shall be governed by, and construed in accordance with, the
laws of the Province of Ontario and the laws of Canada applicable therein and
shall be treated in all respects as an Ontario contract. Each of the parties
irrevocably attorns to the jurisdiction of the courts of Ontario.
10.5 BINDING EFFECT AND ASSIGNMENT
This Agreement and all the provisions hereof shall be binding upon and
enure to the benefit of the parties hereto and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights hereunder or
under the Arrangement shall be assigned by a party hereto without the prior
written consent of the other party.
10.6 TIME OF ESSENCE
Time shall be of the essence of this Agreement.
10.7 COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
10.8 FEES AND EXPENSES
MDS and the Corporation shall each be responsible for their own fees and
expenses (including, without limitation, the fees and expenses of their legal,
financial and accounting advisors) in connection with the entry into of this
Agreement and the consummation of the transactions contemplated herein.
Notwithstanding the foregoing, provided the Arrangement is completed and this
Agreement is not otherwise terminated prior to the Effective Date, MDS shall
reimburse the Corporation or New Hemosol, as applicable, for 50% of the fees and
expenses (including without limitation the fees and expenses of legal advisors,
printing expenses and stock exchange and other regulatory fees) incurred by the
Corporation or New Hemosol up to a maximum reimbursement of $300,000 in
connection with the preparation and mailing of the Circular, the application for
the Interim Order and Final Order, the holding of the Special Meeting, the
preparation for (to the extent such preparation is after the date hereof) and
closing of the transactions contemplated herein.
10.9 FURTHER ASSURANCES
Notwithstanding that the transactions or events set out herein shall occur
and shall be deemed to occur in the order set out in this Plan of Arrangement
without any further act or formality, the Corporation and MDS agree to make, do
and execute, or cause and cause to be made, done and executed, all such further
acts, deeds, agreements, transfers, assurances, instruments or documents as may
be reasonably required by any of them in order to document or evidence any of
the transactions or events set out herein.
D-23
IN WITNESS WHEREOF each of the parties hereto has executed this Agreement
as of the date first written above.
HEMOSOL INC.
By: (Signed) LEE D. HARTWELL
--------------------------------------
Name: Lee D. Hartwell
Title: President, Chief Executive
Officer and
Chief Financial Officer
MDS INC.
By: (Signed) JAMES A.H. GARNER
--------------------------------------
Name: James A.H. Garner
Title: Executive Vice-President and
Chief Financial Officer
By: (Signed) PETER BRENT
--------------------------------------
Name: Peter Brent
Title: General Counsel and Corporate
Secretary
D-24
EXHIBIT 1
HEMOSOL INC.
PLAN OF ARRANGEMENT UNDER SECTION 182 OF
THE BUSINESS CORPORATIONS ACT (ONTARIO)
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Plan of Arrangement and the Appendices hereto, unless there is
something in the subject matter or context inconsistent therewith, the following
terms shall have the following meanings, respectively:
"ACT" means the Business Corporations Act (Ontario), as now enacted or as
the same may from time to time be amended, re-enacted or replaced (and in
the case of such amendment, re-enactment or replacement, any reference
herein shall be read as referring to such amended, re-enacted or replaced
provisions).
"ARRANGEMENT" means the arrangement under section 182 of the Act on the
terms and conditions set out in this Plan of Arrangement, subject to any
amendments or variations thereto made in accordance with this Plan of
Arrangement.
"ARRANGEMENT AGREEMENT" means the arrangement agreement made as of the 11th
day of February, 2004 between the Corporation and MDS to which this Plan of
Arrangement is attached as Exhibit 1 and forms a part, and all amendments
and supplements thereto and restatements thereof.
"BLOOD PRODUCTS ASSETS" means all of the assets owned or leased by the
Corporation immediately prior to the Effective Time.
"BLOOD PRODUCTS CONTRIBUTION AGREEMENT" means the contribution agreement
dated the Effective Date between the Corporation and the Blood Products
Limited Partnership pursuant to which the Blood Products Limited Partnership
will acquire the Blood Products Assets and assume the Blood Products
Liabilities from the Corporation.
"BLOOD PRODUCTS LIABILITIES" means all liabilities (contingent and
otherwise) and other obligations of the Corporation immediately prior to the
Effective Time.
"BLOOD PRODUCTS LIMITED PARTNERSHIP" means Hemosol LP, the limited
partnership formed under the laws of Ontario by the Corporation and New
Hemosol on -- , 2004 to acquire the Blood Products Assets and assume
the Blood Products Liabilities and otherwise carry on the business of the
Corporation on and after the Effective Time.
"BLOOD PRODUCTS LP AGREEMENT" means the limited partnership agreement dated
-- , 2004 between the Corporation and New Hemosol that sets out the
terms and conditions of the Blood Products Limited Partnership.
"BLOOD PRODUCTS LP UNIT" means a partnership unit of the Blood Products
Limited Partnership.
"BOARD OF DIRECTORS" means the board of directors of the Corporation from
time to time.
"BUSINESS DAY" means a day, other than Saturday, Sunday, or a statutory or
civic holiday in Toronto, Canada.
"CASH FLOW", for any Distribution Period, shall equal the following:
(i) all cash or cash equivalents which are received by the Corporation in
such Distribution Period, including, without limitation, any
distributions received by the Corporation from the Partnerships;
plus:
(ii) all cash or cash equivalents received by the Corporation in any prior
Distribution Period to the extent not previously distributed unless
such amounts have been set aside by the Board of Directors in a prior
Distribution Period for distribution to the holders of the Class A
Common Shares and/or the Class B Non-Voting Shares in a subsequent
Distribution Period, in which case such amounts set aside shall not be
included in Cash Flow;
D-25
less the following amounts (referred to collectively as the "Cash Flow
Deductions"):
(iii) all costs, expenses and debts of the Corporation which, in the opinion
of the Board of Directors, may reasonably be considered to have
accrued or become owing in respect of, or which relate to, such
Distribution Period or a prior Distribution Period if not deducted in
the calculation of Cash Flow for such prior period;
(iv) any tax liability of the Corporation in respect of, or which relates
to, such Distribution Period; and
(v) any cash or cash equivalents which are received by the Corporation in
the Distribution Period which the Board of Directors has determined to
set aside for distribution to the holders of the Class A Common Shares
and/or the Class B Non-Voting Shares in a subsequent Distribution
Period.
"CLASS A COMMON SHARES" means shares in the capital of the Corporation of a
class designated as Class A common shares to be created and issued pursuant
to this Plan of Arrangement and having the attributes as a class set out in
the Share Conditions.
"CLASS B NON-VOTING SHARES" means the shares in the capital of the
Corporation of a class designated as Class B non-voting shares to be created
and issued pursuant to this Plan of Arrangement and having the attributes as
a class set out in the Share Conditions.
"CLASS C PREFERRED SHARES" means the shares in the capital of the
Corporation of a class designated as Class C preferred shares to be created
and issued pursuant to this Plan of Arrangement and having the attributes as
a class set out in the Share Conditions.
"CLASS C REDEMPTION AMOUNT" has the meaning assigned thereto in clause 5.4.1
of Appendix A.
"COMMON SHARES" means the issued and outstanding common shares in the
capital of the Corporation.
"CONVERTIBLE SECURITIES" means all securities of the Corporation that are
convertible or exercisable into or otherwise give the holder the right to
acquire Common Shares or other securities of the Corporation, other than
Options, which are outstanding immediately prior to the Effective Time.
"CORPORATION" means Hemosol Inc., a corporation incorporated under the laws
of Ontario.
"COURT" means the Ontario Superior Court of Justice.
"DISTRIBUTABLE CASH FLOW" for, or in respect of, a Distribution Period shall
be the Cash Flow of the Corporation for such Distribution Period, together
with any Cash Flow set aside in a prior Distribution Period for distribution
to the holders of the Class A Common Shares and/or the Class B Non-Voting
Shares in a subsequent Distribution Period which the Board of Directors has
determined to distribute in respect of the current Distribution Period, less
any amount which the Board of Directors may reasonably consider to be
necessary to provide for the payment of any costs and repayments of debts
which have been or will be incurred in the activities and operations of the
Corporation in addition to the Cash Flow Deductions.
"DISTRIBUTION PERIOD" means each month in each calendar year from and
including the first day thereof and to and including the last day thereof,
provided that the first Distribution Period shall begin on (and include) the
Effective Date and shall end on (and include) the last day of the month in
which the Effective Date occurs.
"EFFECTIVE DATE" means the date upon which this Plan of Arrangement becomes
effective as established by the date of issue shown on the certificate of
arrangement giving effect to the Arrangement issued by the Director pursuant
to section 183 of the Act.
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date.
"EXISTING STOCK OPTION PLAN" means the Corporation's stock option plan dated
December 7, 2000.
"ESCROW AGREEMENT" means the escrow agreement dated the Effective Date
between the Corporation, New Hemosol, and an escrow agent mutually
acceptable to the Corporation and New Hemosol, acting reasonably.
"FINAL ORDER" means the order of the Court made in connection with the
approval of the Arrangement as such order may be amended or modified by the
highest court which hears an appeal in respect of such order.
"INITIAL SHARE" means the one New Hemosol Share held by the Corporation
immediately prior to the Effective Time.
D-26
"INTERIM ORDER" means the interim order of the Court, as it may be amended,
made in connection with the Arrangement as contemplated by section 2.2 of
the Arrangement Agreement.
"LABS ASSETS" means the assets of the Labs Business that will be contributed
to the Labs Limited Partnership by MDS pursuant to the terms of the Labs
Contribution Agreement.
"LABS BUSINESS" means the clinical laboratory services business carried on
by MDS in Ontario immediately prior to the Effective Time which, for greater
certainty, does not include diagnostic imaging, water testing, real estate
investments, the Executive Health Clinic, MDS' joint venture with University
Health Network called Toronto Medical Laboratories and MDS' financial
interest in Windsor Medical Laboratories.
"LABS CONTRIBUTION AGREEMENT" means the contribution agreement dated the
Effective Date between MDS and the Labs Limited Partnership pursuant to
which MDS will contribute the Labs Assets to the Labs Limited Partnership.
"LABS LIMITED PARTNERSHIP" means MDS Laboratory Services, L.P., a limited
partnership formed by MDS and Subco under the laws of Ontario on -- ,
2004 to acquire the Labs Assets and carry on the Labs Business on and after
the Effective Time.
"LABS LIMITED PARTNERSHIP INTEREST" means the 99.99% limited partnership
interest in the Labs Limited Partnership.
"LABS LP AGREEMENT" means the limited partnership agreement dated -- ,
2004 between MDS and Subco that sets out the terms and conditions of the
Labs Limited Partnership.
"LABS LP UNIT" means a limited partnership unit of the Labs Limited
Partnership.
"MDS" means MDS Inc., a corporation governed by the laws of Canada.
"MEETING" means the special meeting of holders of Common Shares and
Convertible Securities and any adjournment(s) or postponement(s) thereof,
called and held in accordance with the Interim Order to consider, among
other things, a special resolution in respect of the Arrangement.
"MOU" means the memorandum of understanding between MDS and the Corporation
dated October 22, 2002, as amended on December 23, 2003 relating to the
issuance of Tranche B Warrants in certain circumstances.
"NEW HEMOSOL" means Hemosol Corp., a corporation incorporated under the Act
on February 24, 2004 and which immediately prior to the Effective Time is a
wholly-owned subsidiary of the Corporation.
"NEW HEMOSOL MOU" means the memorandum of understanding between MDS and New
Hemosol dated the Effective Date relating to the issuance of warrants to
purchase up to 2,000,000 New Hemosol Shares on substantially the same terms
as the Tranche B Warrants except that the number of warrants vesting each
month shall be reduced by 50% and the exercise price shall be reduced by
$0.04.
"NEW HEMOSOL OPTIONS" means options to acquire New Hemosol Shares issued
under the New Hemosol Stock Option Plan.
"NEW HEMOSOL SHARE" means a common share in the capital of New Hemosol.
"NEW HEMOSOL STOCK OPTION PLAN" means the employee stock option plan of New
Hemosol dated the Effective Date.
"OPTION" means an option to purchase Common Shares issued by the Corporation
pursuant to the Existing Stock Option Plan and which is outstanding
immediately prior to the Effective Time.
"PARTNERSHIP INTEREST TRANSFER AGREEMENT" means the transfer agreement dated
the Effective Date between MDS and the Corporation pursuant to which MDS
will transfer the Labs Limited Partnership Interest to the Corporation and
surrender for cancellation 500,000 Tranche A Warrants and the right to
acquire 2,000,000 Tranche B Warrants and the Corporation shall issue to MDS
-- Class A Common Shares and -- Class B Non-Voting Shares and will
grant a right of first refusal and option in respect of the Labs Limited
Partnership Interest to MDS.
"PARTNERSHIP INTERESTS" means, collectively, the limited partnership
interests in each of the Partnerships acquired by the Corporation as part of
the Arrangement.
D-27
"PARTNERSHIPS" means, collectively, the Blood Products Limited Partnership
and the Labs Limited Partnership.
"PERSON" includes an individual, body corporate, partnership, joint venture,
trust, association, unincorporated organisation, or any other entity
recognised by law or considered to be a person for purposes of the Tax Act.
"PLAN OF ARRANGEMENT" means this plan of arrangement as amended,
supplemented or restated from time to time, together with the Appendices
hereto.
"SHARE CONDITIONS" means conditions of the Class A Common Shares, Class B
Non-Voting Shares and Class C Preferred Shares as set out in Appendix A
hereto.
"SPECIFIED OPTIONS" means collectively (i) 2,766,225 Options with an
exercise price of $0.90 per Common Share issued on October 29, 2003
conditional upon TSX and shareholder approval; (ii) 775,000 Options with an
exercise price of $1.60 per Common Share issued on December 11, 2003
conditional upon TSX and shareholder approval; (iii) 5,613 Options with an
exercise price of $0.93 per Common Share issued on June 3, 2003; (iv)
164,000 Options with an exercise price of $2.10 per Common Share issued on
February 10, 1998, of which 124,000 are outstanding as of the date hereof;
(v) 30,000 Options with an exercise price of $2.26 per Common Share issued
on December 17, 2002; (vi) 36,000 Options with an exercise price of $2.45
per Common Share issued on April 30, 1998; (vii) 30,000 Options with an
exercise price of $2.45 per Common Share issued on April 30, 1998, of which
17,500 are outstanding as of the date hereof; (viii) 10,000 Options with an
exercise price of $3.85 per Common Share issued on February 11, 1997; (ix)
34,240 Options with an exercise price of $4.60 per Common Share issued on
May 21, 1999; (x) 10,480 Options with an exercise price of $4.60 per Common
Share issued on May 21, 1999; (xi) 30,000 Options with an exercise price of
$6.30 per Common Share issued on December 13, 2001; (xii) 24,057 Options
with an exercise price of $6.63 per Common Share issued on February 8, 1996;
(xiii) 10,431 Options with an exercise price of $15.10 per Common Share
issued on February 9, 2000; (xiv) 4,104 Options with an exercise price of
$15.10 per Common Share issued on February 9, 2000; (xv) 37,705 Options with
an exercise price of $15.25 per Common Share issued on December 7, 2000;
(xvi) 10,000 Options with an exercise price of $15.25 per Common Share
issued on December 7, 2000; (xvii) 3,832 Options with an exercise price of
$15.25 per Common Share issued on December 7, 2000; and (xviii) 2,500
Options with an exercise price of $15.25 per Common Share issued on December
7, 2000.
"SUBCO" means MDS Laboratory Services Inc., a wholly-owned subsidiary of MDS
incorporated under the Canada Business Corporations Act on December 19,
2003.
"TAX ACT" means the Income Tax Act (Canada), as now enacted or as the same
may from time to time be amended, re-enacted or replaced (and in the case of
such amendment, re-enactment or replacement, any reference herein shall be
read as referring to such amended, re-enacted or replaced provisions).
"TRADING DAY" means a day, other than a Saturday or Sunday, when the Toronto
Stock Exchange and the Nasdaq National Market are open for trading.
"TRANCHE A WARRANTS" means the warrants of the Corporation issued to MDS
entitling MDS to acquire, on the due exercise thereof, up to 6,000,000
Common Shares, on the terms and conditions set out in the warrant
certificate dated November 22, 2002.
"TRANCHE B WARRANTS" means warrants of the Corporation to purchase up to
4,000,000 Common Shares to be issued to MDS in certain circumstances on the
terms and conditions set out in the MOU.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Plan of Arrangement into articles, sections and other
portions and the insertion of headings are for convenience of reference only and
shall not affect the construction or interpretation of this Plan of Arrangement.
1.3 NUMBER, GENDER
Unless the subject matter or context requires the contrary, words importing
the singular number only shall include the plural and vice versa and words
importing the use of any gender shall include all genders.
D-28
1.4 CURRENCY
All sums of money referred to in this Plan of Arrangement are expressed and
shall be payable in Canadian dollars.
1.5 TIME
Time shall be of the essence in each and every matter or thing herein
provided. Unless otherwise indicated, all times expressed herein are local time
at Toronto, Ontario.
1.6 GOVERNING LAW
This Plan of Arrangement shall be governed by and construed in accordance
with the laws of the Province of Ontario and the federal laws of Canada
applicable therein.
1.7 THE ARRANGEMENT AGREEMENT
The Arrangement is made pursuant to and subject to the provisions of the
Arrangement Agreement. The implementation of this Plan of Arrangement is
expressly subject to the fulfilment or waiver by the party or parties thereto
entitled of the conditions precedent set out in the Arrangement Agreement.
ARTICLE 2
THE ARRANGEMENT
2.1 THE ARRANGEMENT
At the Effective Time, the following shall occur and shall be deemed to
have occurred in the following order without any further act or formality:
(a) Subco shall contribute $50,000 to the Labs Limited Partnership for its
0.01% general partnership interest in the Labs Limited Partnership
pursuant to the terms of the Labs LP Agreement;
(b) in accordance with the terms of the Labs Contribution Agreement, MDS
shall contribute the Labs Assets to the Labs Limited Partnership and
the Labs Limited Partnership shall issue the Labs Limited Partnership
Interest to MDS in consideration therefor;
(c) New Hemosol shall contribute $6,000 to the Blood Products Limited
Partnership and the Blood Products Limited Partnership shall issue one
Blood Products LP Unit to New Hemosol in consideration therefor;
(d) in accordance with the Blood Products Contribution Agreement, the
Corporation shall contribute the Blood Products Assets to the Blood
Products Limited Partnership and, in consideration therefor, the Blood
Products Limited Partnership shall assume the Blood Products
Liabilities and issue 9,999 Blood Products LP Units to the
Corporation;
(e) all Options shall be cancelled and shall cease to be outstanding and
(i) all holders of Options who have consented to the treatment of
their Options as contemplated in this clause (i) shall receive in
exchange for each of such cancelled Options that are Specified
Options, one New Hemosol Option with vesting and exercise terms
equivalent to such cancelled Specified Options and an exercise price
equal to the exercise price of such cancelled Specified Option less
$0.04 and shall receive no New Hemosol Options in exchange for their
cancelled Options that are not Specified Options; and (ii) all holders
of Options who have not consented to the treatment of their Options as
contemplated in the preceding clause (i) and all holders of Options
who do not hold any Specified Options shall receive in exchange for
each of such cancelled Options, one New Hemosol Option with vesting
and exercise terms equivalent to such cancelled Option and an exercise
price equal to the exercise price of such cancelled Option less $0.04;
(f) the articles of the Corporation shall be amended to create and
authorize the issuance of an unlimited number of Class A Common Shares
and Class B Non-Voting Shares and that number of Class C Preferred
Shares equal to the number of issued and outstanding Common Shares of
the Corporation immediately prior to the Effective Time in each case
having the rights, privileges, restrictions and conditions set forth
in the Share Conditions;
(g) the Initial Share shall be purchased for cancellation by New Hemosol
from the Corporation in consideration for a cash payment of $1.00;
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(h) each holder of Common Shares shall be deemed to have exchanged each
issued and outstanding Common Share for one Class A Common Share and
one Class C Preferred Share and each such Common Share shall be
cancelled such that upon the completion of the foregoing no Common
Shares shall be outstanding;
(i) the amount to be added to the stated capital account maintained for
the Class C Preferred Shares in respect of each Class C Preferred
Share shall be equal to the Class C Redemption Amount;
(j) the amount to be added to the stated capital account maintained for
the Class A Common Shares shall be equal to the fair market value of
the Common Shares immediately prior to the Effective Time (determined
by multiplying the number of Common Shares outstanding immediately
before the Effective Time by the weighted average trading price of
the Common Shares for the 10-day period ending on the day before the
Effective Date) and subject to any reduction required by subsection
86(2.1) of the Tax Act less the aggregate Class C Redemption Amount;
(k) the stated capital account maintained in respect of the Common Shares
shall be decreased to zero;
(l) each holder of Class C Preferred Shares shall be deemed to have
transferred each issued and outstanding Class C Preferred Share to
New Hemosol in exchange for one New Hemosol Share such that following
such transfer all issued and outstanding Class C Preferred Shares are
held by New Hemosol;
(m) the Tranche A Warrants shall be amended, in partial consideration for
the issuance of Class A Common Shares and Class B Non-Voting Shares as
provided in paragraph (q), so that the aggregate number of Common
Shares to which MDS is entitled thereunder shall be reduced by 500,000
with such reduction to be effected by reducing by 50% MDS' entitlement
to acquire Common Shares which entitlement has vested (or will vest) on
February 22, 2004, March 22, 2004 and April 22, 2004;
(n) New Hemosol shall assume the obligations of the Corporation under the
Convertible Securities as if such Convertible Securities were a right
to acquire New Hemosol Shares (other than a reduction of the exercise
price of each Convertible Security by $0.04) and the Corporation shall
redeem all issued and outstanding Class C Preferred Shares held by New
Hemosol for a redemption price per Class C Preferred Share equal to
the Class C Redemption Amount which consideration for the assumption
and the redemption price shall be paid by the transfer to New Hemosol
of 9,112 Blood Products LP Units and the cash payment of $16,000,000;
(o) the MOU shall be terminated and New Hemosol and MDS shall enter into
the New Hemosol MOU in partial consideration for the issuance by the
Corporation of Class A Common Shares and Class B Non-Voting Shares as
provided in paragraph (q);
(p) New Hemosol shall subscribe for 2,500 additional Blood Products LP
Units in consideration for a subscription price of $15,000,000 such
that following such subscription New Hemosol shall hold 11,613 Blood
Products LP Units and the Corporation shall hold 887 Blood Products LP
Units;
(q) the Corporation shall issue to MDS -- Class A Common Shares and
-- Class B Non-Voting Shares in consideration for the Labs
Limited Partnership Interest transferred from MDS in accordance with
the terms of the Partnership Interest Transfer Agreement and the
surrender to the Corporation of 500,000 Tranche A Warrants and the
surrender to the Corporation of the right to acquire 2,000,000 Tranche
B Warrants;
(r) the amount to be added to the stated capital account maintained by the
Corporation for the Class A Common Shares and the Class B Non-Voting
Shares in respect of the shares issued in (p) shall be equal to the
value of the consideration received for the issuance of such shares
less the deduction required by subsection 85(2.1) of the Tax Act;
(s) the articles of the Corporation shall be amended to change the name of
the Corporation to " -- ", to delete the provisions relating to
registered office, number of directors, authorized share capital and
share conditions of the Common Shares and the special shares of the
Corporation and to add the provisions set out in Appendix A relating
to registered office, number of directors, corporate objects,
authorized capital and share conditions;
(t) the board of directors of the Corporation shall consist of --
members, initially being -- ; and
(u) the year-end of the Corporation shall be October 31.
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ARTICLE 3
CERTIFICATES
3.1 COMMON SHARE CERTIFICATES
On and after the Effective Time until the close of business on the fifth
Trading Day following the Effective Date, certificates formerly representing
Common Shares shall represent and be deemed to represent only the right to
receive New Hemosol Shares and Class A Common Shares in accordance with this
Plan of Arrangement. Following the close of business on the fifth Trading Day
following the Effective Date, such certificates shall cease to represent a claim
or interest of any kind or nature, including a claim for dividends or other
distributions, against the Corporation or New Hemosol.
3.2 NEW SHARE CERTIFICATES
As soon as practicable, certificates representing New Hemosol Shares and
Class A Common Shares shall be mailed to those persons whose names appear on the
register of holders of Common Shares at the close of business on the fifth
Trading Day following the Effective Date.
3.3 OPTIONS AND CONVERTIBLE SECURITY AGREEMENTS
On and after the Effective Time, (a) the agreements providing for the
Options shall represent only the right to receive the New Hemosol Options to
which the holders thereof are entitled under the Arrangement and (b) the
agreements providing for the Convertible Securities shall represent only the
right to exercise into New Hemosol Shares as contemplated under the Arrangement.
ARTICLE 4
AMENDMENTS
4.1 AMENDMENTS
The parties to the Arrangement Agreement may amend, modify and/or
supplement this Plan of Arrangement at any time and from time to time prior to
the Effective Time, provided that each such amendment, modification and/or
supplement must be: (i) set out in writing; (ii) filed with the Court and, if
made following the Meeting, approved by the Court; and (iii) communicated to
holders of Common Shares if and as required by the Court.
4.2 APPROVAL AT MEETING
Any amendment, modification or supplement to this Plan of Arrangement may
be proposed by the parties to the Arrangement Agreement at any time prior to or
at the Meeting with or without any other prior notice or communication, and if
so proposed and accepted by the persons voting at the Meeting (other than as may
be required under the Interim Order), shall become part of this Plan of
Arrangement for all purposes.
4.3 AFTER EFFECTIVE TIME
Any amendment, modification or supplement to this Plan of Arrangement may
be made following the Effective Time but shall only be effective if it is
consented to by each of the parties to the Arrangement Agreement and New
Hemosol, provided that it concerns a matter which, in the reasonable opinion of
the parties to the Arrangement Agreement and New Hemosol is of an administrative
nature required to better give effect to the implementation of this Plan of
Arrangement and is not adverse to the financial or economic interests of the
parties to the Arrangement Agreement, New Hemosol or any former holder of Common
Shares or Options.
D-31
APPENDIX A
ARTICLE 1
REGISTERED OFFICE
1.1 The registered office of the Corporation is 100 International Boulevard,
Toronto, Ontario M9W 6J6.
ARTICLE 2
DIRECTORS
2.1 The number of directors of the Corporation shall be a minimum of four and
a maximum of six.
ARTICLE 3
CORPORATE OBJECTS
3.1 RESTRICTIONS ON BUSINESS
The Corporation is a limited purpose corporation whose objective shall be
to maximize Distributable Cash Flow through the Partnership Interests (and any
property and/or assets that are acquired or received by the Corporation in
accordance with Subsection 3.1(b)(i)) and to distribute all Distributable Cash
Flow to holders of the Class A Common Shares and Class B Non-Voting Shares and,
in connection therewith, the Corporation:
(a) shall, at the end of each Distribution Period, distribute all
Distributable Cash Flow to holders of its Class A Common Shares and
Class B Non-Voting Shares by way of dividends or other distributions,
subject to the other provisions of these articles and to applicable
law; and
(b) shall not, directly or indirectly, carry on any business, purchase or
otherwise acquire or sell, transfer or otherwise dispose of any assets
or exercise any powers other than:
(i) holding the Partnership Interests and not selling, transferring or
otherwise disposing of all or any part of either Partnership
Interest except (A) in accordance with a sale, transfer or other
disposition carried out pursuant to the terms of the partnership
agreement governing the applicable Partnership or (B) on the
liquidation, dissolution or wind-up of the applicable Partnership,
in which case the Corporation shall hold the property and/or
assets that are acquired or received by the Corporation as a
result of such sale, transfer or other disposition or such
liquidation, dissolution or wind-up and shall deal with such
property and/or assets as the Board of Directors considers
appropriate in the ordinary course of the Corporation's business;
(ii) performing its obligations and exercising its rights under any
agreements entered into by the Corporation in connection with the
Arrangement and any other agreements entered into by the
Corporation in the ordinary course of the Corporation's business;
(iii) issuing shares (or rights, warrants, convertible securities or
options to acquire shares) for valuable consideration provided
that (A) any such issuance is consistent with the Corporation's
articles, and (B) no Class A Common Shares (or rights, warrants,
convertible securities or options to acquire Class A Common
Shares) may be issued except in connection with a stock dividend,
a stock split or similar event that affects all holdings of Class
A Common Shares in the same manner, on a per share basis;
(iv) borrowing money upon the credit of the Corporation, and granting
security therefor, in the ordinary course of the Corporation's
business;
(v) temporarily holding cash in interest bearing accounts, short-term
government debt or short-term investment grade corporate debt for
the purposes of paying the expenses of the Corporation, making
dividends or other distributions to shareholders of the Corporation
and carrying out any other activities in the ordinary course of the
Corporation's business;
(vi) satisfying the obligations, liabilities or indebtedness of the
Corporation; and
(vii) engaging in any acts or exercising any powers necessary or
desirable to carry out the ordinary course of the Corporation's
business, including as provided in the articles and by-laws of the
Corporation.
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3.2 AMENDMENTS TO RESTRICTIONS ON BUSINESS
In addition to any other approvals required by the Act, the foregoing
restrictions and limitations may only be amended, supplemented, repealed or
otherwise modified by resolution passed by the affirmative vote of at least two-
thirds of the votes cast at a meeting of the holders of each class of the
Corporation's issued and outstanding Class A Common Shares and Class B
Non-Voting Shares, each voting separately as a class, duly called for that
purpose. The formalities to be observed in respect of the giving of notice of
any such meeting or any adjourned meeting and the conduct thereof shall be those
from time to time required by the Act and prescribed in the by-laws of the
Corporation with respect to meetings of shareholders.
ARTICLE 4
AUTHORIZED SHARE CAPITAL
4.1 The Corporation is authorized to issue (i) an unlimited number of Class A
Common Shares, (ii) an unlimited number of Class B Non-Voting Shares, and
(iii) -- Class C Preferred Shares, as such number may be reduced in
accordance with Section 5.4.6 hereof.
In addition to any other approvals required by the Act, the Corporation
shall not create any shares ranking in priority to or on a parity with the Class
A Common Shares or the Class B Non-Voting Shares without the prior approval of
the holders of each class of the Corporation's shares by resolution passed by
the affirmative vote of at least two-thirds of the votes cast at a meeting of
the holders of each class of the Corporation's issued and outstanding shares,
voting separately as a class, duly called for that purpose. The formalities to
be observed in respect of the giving of notice of any such meeting or any
adjourned meeting and the conduct thereof shall be those from time to time
required by the Act and prescribed in the by-laws of the Corporation with
respect to meetings of shareholders.
ARTICLE 5
SHARE CONDITIONS
5.1 PROVISIONS ATTACHING TO THE CLASS A COMMON SHARES
The Class A Common Shares shall have attached thereto the following rights,
privileges, restrictions and conditions:
5.1.1 DIVIDENDS
Subject to the prior rights of the holders of the Class C Preferred Shares
and any other shares ranking senior to the Class A Common Shares and the Class B
Non-Voting Shares with respect to priority in the payment of dividends, the
holders of Class A Common Shares and the holders of Class B Non-Voting Shares
shall be entitled to receive dividends and the Corporation shall pay dividends
thereon, as and when declared by the Board of Directors (provided that no
dividends shall be declared on or prior to October 31, 2004) out of
Distributable Cash Flow, in such amount and in such form as the Board of
Directors may from time to time determine and all dividends which the Board of
Directors may declare on the Class A Common Shares and the Class B Non-Voting
Shares shall be declared and paid in equal amounts per share on all Class A
Common Shares and Class B Non-Voting Shares at the time outstanding without
preference or distinction; provided that dividends may be declared and paid on
the Class B Non-Voting Shares in advance of dividends declared and paid on the
Class A Common Shares so long as the aggregate amount per share of all dividends
declared and paid on the Class A Common Shares in any fiscal year of the
Corporation equals (without regard to the timing of payment of such dividends)
the aggregate amount per share of all dividends declared and paid on the Class B
Non-Voting Shares in such fiscal year of the Corporation. Such dividends shall
be paid by cheques of the Corporation payable at par at any branch of the
Corporation's bankers for the time being in Canada issued in respect of such
dividends or in such other manner as is required by the Corporation's bankers or
as required by law (less any tax required to be withheld by the Corporation) and
payment thereof shall satisfy such dividends. Dividends which are represented by
a cheque which has not been presented to the Corporation's bankers for payment
or that otherwise remain unclaimed for a period of six years from the date on
which they were declared to be payable shall be forfeited to the Corporation.
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5.1.2 DISSOLUTION
In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding-up
its affairs, subject to the prior rights of the holders of the Class C Preferred
Shares and any other shares ranking senior to the Class A Common Shares and
Class B Non-Voting Shares with respect to priority in the distribution of assets
upon dissolution, liquidation, winding-up or distribution for the purpose of
winding-up, the holders of the Class A Common Shares and the holders of the
Class B Non-Voting Shares shall be entitled to receive the remaining property
and assets of the Corporation in equal amounts per share without preference or
distinction.
5.1.3 VOTING RIGHTS
Subject to Section 5.8, the holders of the Class A Common Shares shall be
entitled to receive notice of and to attend all meetings of the shareholders of
the Corporation and shall have one vote for each Class A Common Share held at
all meetings of the shareholders of the Corporation, except meetings at which
only holders of another specified class or series of shares of the Corporation
are entitled to vote separately as a class or series.
5.2 PROVISIONS ATTACHING TO THE CLASS B NON-VOTING SHARES
The Class B Non-Voting Shares shall have attached thereto the following
rights, privileges, restrictions and conditions:
5.2.1 DIVIDENDS
Subject to the prior rights of the holders of the Class C Preferred Shares
and any other shares ranking senior to the Class B Non-Voting Shares and the
Class A Common Shares with respect to priority in the payment of dividends, the
holders of Class B Non-Voting Shares and the holders of Class A Common Shares
shall be entitled to receive dividends and the Corporation shall pay dividends
thereon, as and when declared by the Board of Directors (provided that no
dividends shall be declared on or prior to October 31, 2004) out of
Distributable Cash Flow, in such amount and in such form as the Board of
Directors may from time to time determine and all dividends which the Board of
Directors may declare on the Class B Non-Voting Shares and the Class A Common
Shares shall be declared and paid in equal amounts per share on all Class B
Non-Voting Shares and Class A Common Shares at the time outstanding without
preference or distinction; provided that dividends may be declared and paid on
the Class B Non-Voting Shares in advance of dividends declared and paid on the
Class A Common Shares so long as the aggregate amount per share of all dividends
declared and paid on the Class A Common Shares in any fiscal year of the
Corporation equals (without regard to the timing of payment of such dividends)
the aggregate amount per share of all dividends declared and paid on the Class B
Non-Voting Shares in such fiscal year of the Corporation. Such dividends shall
be paid by cheques of the Corporation payable at par at any branch of the
Corporation's bankers for the time being in Canada issued in respect of such
dividends or in such other manner as is required by the Corporation's bankers or
as required by law (less any tax required to be withheld by the Corporation) and
payment thereof shall satisfy such dividends.
Dividends which are represented by a cheque which has not been presented to
the Corporation's bankers for payment or that otherwise remain unclaimed for a
period of six years from the date on which they were declared to be payable
shall be forfeited to the Corporation.
5.2.2 DISSOLUTION
In the event of the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, or any other distribution of
assets of the Corporation among its shareholders for the purpose of winding-up
its affairs, subject to the prior rights of the holders of the Class C Preferred
Shares and any other shares ranking senior to the Class B Non-Voting Shares and
the Class A Common Shares with respect to priority in the distribution of assets
upon dissolution, liquidation, winding-up or distribution for the purpose of
winding-up, the holders of the Class B Non-Voting Shares and the holders of the
Class A Common Shares shall be entitled to receive the remaining property and
assets of the Corporation in equal amounts per share without preference or
distinction.
5.2.3 VOTING RIGHTS
Subject to applicable law and any other provisions of the articles of the
Corporation, the holders of the Class B Non-Voting Shares shall not be entitled
to receive notice of, nor to attend nor vote at any meetings of the
D-34
shareholders of the Corporation; provided that in the event that holders of the
Class B Non-Voting Shares are entitled by law or the articles of the Corporation
to vote at a meeting of holders of Class B Non-Voting Shares, the holders of
Class B Non-Voting Shares shall have one vote for each Class B Non-Voting Share
held.
5.3 PROVISIONS ATTACHING TO THE CLASS C PREFERRED SHARES
The Class C Preferred Shares shall have attached thereto the following
rights, privileges, restrictions and conditions:
5.3.1 DIVIDENDS
5.3.2 The holders of the Class C Preferred Shares, in priority to the Class A
Common Shares and the Class B Non-Voting Shares and any other shares
ranking junior to the Class C Preferred Shares, shall be entitled to
receive and the Corporation shall pay thereon, as and when declared by the
Board of Directors out of the moneys of the Corporation properly
applicable to the payment of dividends, fixed preferential cumulative cash
dividends at the rate of 0.25% of the Class C Redemption Amount (as
defined below) per month payable monthly within ten days of the end of
each month in each year. Dividends on the Class C Preferred Shares shall
accrue from, but not including, the date of issue of such shares. Such
dividends shall be paid by cheques of the Corporation payable at par at
any branch of the Corporation's bankers for the time being in Canada
issued in respect of such dividends or in such other manner as is required
by the Corporation's bankers or as required by law (less any tax required
to be withheld by the Corporation) and payment thereof shall satisfy such
dividends. Dividends which are represented by a cheque which has not been
presented to the Corporation's bankers for payment or that otherwise
remain unclaimed for a period of six years from the date on which they
were declared to be payable shall be forfeited to the Corporation. If on
any dividend payment date the dividend payable on such date is not paid in
full on all the Class C Preferred Shares then issued and outstanding, such
dividends or the unpaid part thereof shall be paid on a subsequent date or
dates determined by the Board of Directors on which the Corporation shall
have sufficient moneys properly applicable to the payment of same. The
holders of the Class C Preferred Shares shall not be entitled to any
dividends other than or in excess of the fixed preferential cumulative
cash dividends hereinbefore provided for.
5.3.3 No dividends shall at any time be declared or paid or set apart for
payment on the Class A Common Shares and the Class B Non-Voting Shares or
on any shares of any other class of the Corporation ranking junior to the
Class C Preferred Shares and the Corporation shall not call for redemption
nor purchase or otherwise acquire for value less than all the then
outstanding Class C Preferred Shares nor purchase or otherwise acquire for
value any Class A Common Shares, Class B Non-Voting Shares or any shares
of any other class of the Corporation ranking junior to the Class C
Preferred Shares so long as any Class C Preferred Shares are outstanding
unless in each case all dividends, up to and including the dividend
payable on the last preceding dividend payment date, on the Class C
Preferred Shares then issued and outstanding shall have been declared and
paid or set apart for payment at the date of such call for redemption,
purchase or other acquisition for value.
5.3.4 DISSOLUTION
In the event of the dissolution, liquidation or winding-up of the
Corporation or other distribution of assets of the Corporation among
shareholders for the purpose of winding up its affairs, the holders of the Class
C Preferred Shares shall be entitled to receive from the assets and property of
the Corporation for each Class C Preferred Share held by them respectively the
Class C Redemption Amount (as defined in Section 5.4) together with all accrued
and unpaid preferential cumulative cash dividends thereon (which for such
purpose shall be calculated as if such dividends were accruing from day to day
for the period from the expiration of the last period for which cumulative
dividends have been paid up to but excluding the date of distribution) before
any amount shall be paid or any assets or property of the Corporation
distributed to the holders of any Class A Common Shares, Class B Non-Voting
Shares or shares of any other class ranking junior to the Class C Preferred
Shares. After payment to the holders of the Class C Preferred Shares of the
amounts so payable to them as above provided, they shall not be entitled to
share in any further distribution of the assets or property of the Corporation.
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5.4 REDEMPTION BY THE CORPORATION
5.4.1 In this Section 5.4, the "Class C Redemption Amount" for each Class C
Preferred Share shall be the amount determined by dividing $ -- by the
number of issued and outstanding Class C Preferred Shares, subject to
adjustment as provided in Section 5.4.2.
5.4.2 The aggregate Class C Redemption Amount (which shall be determined by
multiplying the total number of issued and outstanding Class C Preferred
Shares by the Class C Redemption Amount) shall be deemed to be reduced, on
a dollar-for-dollar basis and from time to time, by an amount equal to any
amounts released from escrow and paid to the Corporation pursuant to the
terms of the Escrow Agreement.
5.4.3 Subject to the provisions of subsection 32(2) of the Act, the Corporation
may redeem at any time all but not less than all of the then outstanding
Class C Preferred Shares on payment, in cash or in kind, for each share to
be redeemed, the Class C Redemption Amount together with all accrued and
unpaid preferential cumulative cash dividends thereon (which for such
purpose shall be calculated as if the dividends on the Class C Preferred
Shares to be so redeemed were accruing from day to day for the period from
the expiration of the last period for which cumulative dividends have been
paid up to but excluding the date of such redemption).
5.4.4 In the case of redemption of Class C Preferred Shares under the provisions
of Section 5.4.3 hereof, the Corporation shall, on the date determined by
the Corporation for redemption pay or cause to be paid to or to the order
of each registered holder of the Class C Preferred Shares to be redeemed
the Class C Redemption Amount and any other amounts required by Section
5.4.3 for each Class C Preferred Share registered in the name of such
holder on presentation and surrender of the certificates representing the
Class C Preferred Shares redeemed at the registered office of the
Corporation or any other place or places designated by the Corporation. On
and after the date of redemption, the Class C Preferred Shares called for
redemption shall cease to be entitled to dividends and the holders thereof
shall not be entitled to exercise any of the rights of shareholders in
respect thereof unless payment of the Class C Redemption Amount and any
other amounts required by Section 5.4.3 in respect thereof shall not be
made upon presentation of certificates in accordance with the foregoing
provisions, in which case the rights of the shareholders shall remain
unaffected.
5.4.5 The Corporation shall have the right at any time on and after the date
determined by the Corporation for redemption of the Class C Preferred
Shares to deposit the redemption price of the shares so called for
redemption to a special account in a specified chartered bank or a
specified trust company in Canada, to be paid without interest to or to
the order of the respective holders of such Class C Preferred Shares
called for redemption upon presentation and surrender to such bank or
trust company of the certificates representing the same. Upon such deposit
being made, the Class C Preferred Shares in respect whereof such deposit
shall have been made shall be deemed to be redeemed and all rights of the
holders thereof after such deposit shall be limited to receiving without
interest their proportionate part of the total Class C Redemption Amount
so deposited against presentation and surrender of the said certificates
held by them respectively. Any interest allowed on any such deposit shall
belong to the Corporation. Redemption moneys that are represented by a
cheque which has not been presented to the Corporation's bankers for
payment or that otherwise remain unclaimed (including moneys held on
deposit to a special account as provided for above) for a period of six
years from the date specified for redemption shall be forfeited to the
Corporation.
5.4.6 Upon the redemption of the Class C Preferred Shares under the provisions
of Section 5.4.3, the number of authorized Class C Preferred Shares shall
be reduced by the number of Class C Preferred Shares so redeemed.
5.5 VOTING RIGHTS
Subject to applicable law and any other provisions of the articles of the
Corporation, the holders of Class C Preferred Shares shall not be entitled to
receive notice of, nor to attend nor vote at any meetings of the shareholders of
the Corporation; provided that in the event that holders of Class C Preferred
Shares are entitled to vote at a meeting of holders of Class C Preferred Shares,
the holders of Class C Preferred Shares shall have one vote for each Class C
Preferred Share held.
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5.6 PRIORITY
The Class A Common Shares and the Class B Non-Voting Shares shall rank on
parity and junior to the Class C Preferred Shares and shall be subordinate in
all respects to the rights, privileges, restrictions and conditions attaching to
the Class C Preferred Shares.
5.7 SPECIFIED OFFER
5.7.1 DEFINED TERMS
In this Section 5.7, the following terms shall have the following meanings,
respectively:
(a) "BID PRICE" means the consideration for each Class A Common Share and
each Class B Non-Voting Share offered to holders of Class A Common
Shares and holders of Class B Non-Voting Shares, respectively, under
the Required Bids which consideration shall have a fair market value
of not less than the average of the fair market value of a Class A
Common Share on the date that the Required Bids are made as determined
in writing by two nationally recognized investment banking firms
retained by the Offeror for the purpose of providing such valuation in
connection with the Required Bids.
(b) "DESIGNATED NUMBER" means the number of Class A Common Shares that are
subject to a Specified Offer, together with the Offeror's Class A
Common Shares.
(c) "GROUP" means Persons who would constitute a group for purposes of
subsection 111(5) of the Tax Act.
(d) "OFFER DATE" means the date on which a Specified Offer is made.
(e) "OFFER TO ACQUIRE" includes:
(i) an offer to purchase, a public announcement of an intention to
make an offer to purchase, or a solicitation of an offer to sell,
securities;
(ii) the receipt of an offer to sell securities, whether or not such
offer to sell has been solicited,
or any combination thereof, and the Person receiving an offer to sell
shall be deemed to be making an Offer to Acquire to the Person that made
the offer to sell.
(f) "OFFEROR" means a Person that makes an Offer to Acquire Class A Common
Shares, and includes any Persons related to such Person for purposes
of the Tax Act or any other Person that is acting jointly or in
concert with such Person or who would, together with such Person (and
other Persons), constitute a Group.
(g) "OFFEROR'S CLASS A COMMON SHARES", on any date, means the number of
Class A Common Shares beneficially owned, directly or indirectly, or
over which control or direction is exercised (including any
combination of the foregoing), on the relevant date by the Offeror
either alone or together with a Group.
(h) "REQUIRED BIDS" means the concurrent offers required to be made to all
holders of Class A Common Shares and to all holders of Class B
Non-Voting Shares in the circumstances provided in Section 5.7.2.
(i) "SPECIFIED OFFER" means an Offer to Acquire Class A Common Shares made
by an Offeror where the number of Class A Common Shares subject to the
Offer to Acquire (the "SPECIFIED OFFER SHARES"), together with the
Offeror's Class A Common Shares on the Offer Date, would constitute in
the aggregate more than 50% of the total issued and outstanding Class
A Common Shares on the Offer Date.
(j) "SPECIFIED OFFER SHARES" has the meaning set out in Subsection
5.7.1(i).
5.7.2 CONDITION PRECEDENT TO ACQUISITION OF CLASS A COMMON SHARES PURSUANT TO A
SPECIFIED OFFER
An Offeror shall not acquire any Class A Common Shares under a Specified
Offer without first complying with the provisions of this Section 5.7.2. Prior
to, and as a condition precedent to, the acquisition by an Offeror of any Class
A Common Shares under a Specified Offer, the Offeror shall make concurrent
offers to acquire Class A Common Shares and Class B Non-Voting Shares for
consideration for each Class A Common Share and each Class B Non-Voting Share
equal to the Bid Price, on the same terms, except as to the number of shares
subject to
D-37
the offers, which offers shall comply with the provisions of applicable
securities legislation relating to a formal take-over bid (whether or not such
offers are required by law to so comply) (the "REQUIRED BIDS"):
(a) to all holders of Class A Common Shares for such number of Class A
Common Shares as is equal to the number of Specified Offer Shares; and
(b) to all holders of Class B Non-Voting Shares for such number of Class B
Non-Voting Shares that is equal to the lesser of:
(i) A x B, where A equals the Designated Number of Class A Common
Shares divided by the total number of issued and outstanding Class
A Common Shares on the Offer Date and B equals the total number of
issued and outstanding Class B Non-Voting Shares on the date that
the Required Bids are made; and
(ii) the number of issued and outstanding Class B Non-Voting Shares
excluding those that are beneficially owned, or over which control
or direction is exercised, on the date that the Required Bids are
made (including any combination of the foregoing) by the Offeror;
provided that:
(c) no shares may be taken-up or paid for under either of the Required
Bids, unless all shares tendered to each of the Required Bids are
taken-up and paid for concurrently; and
(d) the Offeror shall issue a press release following the expiry of the
Required Bids and one Business Day prior to the take-up of any shares
tendered to the Required Bids, which press release shall disclose:
(i) the approximate number of Class A Common Shares and Class B
Non-Voting Shares tendered to the Required Bids; and
(ii) whether a sufficient number of Class A Common Shares has been
tendered to the Required Bids such that the Offeror would acquire,
on take-up and payment for such shares, when added to the
Offeror's Class A Common Shares on the date of take-up, more than
50% of the total issued and outstanding Class A Common Shares on
the date of take-up.
5.8 FAILURE TO COMPLY
In the event that an Offeror acquires, directly or indirectly, more than
50% of the total issued and outstanding Class A Common Shares in violation of
Section 5.7, then, effective on the completion of such acquisition and during
such time that the Offeror's Class A Common Shares constitute more than 50% of
the total issued and outstanding Class A Common Shares, the total number of
votes attaching to the Offeror's Class A Common Shares shall equal the
difference between: (a) the total number of issued and outstanding Class A
Common Shares, and (b) the number of the Offeror's Class A Common Shares, and,
for greater certainty, the Class A Common Shares other than the Offeror's Class
A Common Shares shall continue to have one vote per share.
D-38
EXHIBIT 2
REPRESENTATIONS AND WARRANTIES OF THE CORPORATION
The Corporation hereby represents and warrants to MDS that the following
are true and correct on the date hereof and acknowledges that MDS is relying
upon these representations and warranties in connection with the entering into
of this Agreement and the transactions contemplated by this Agreement:
(a) Organization. Each of the Corporation and its Subsidiaries has been
duly incorporated or formed under applicable law, is validly existing
and has the corporate or legal power and authority to own its
properties and conduct its businesses as presently owned and
conducted. Each of the Corporation and its Subsidiaries is duly
qualified to carry on business, and is in good standing, in each
jurisdiction in which the character of its properties, owned or
leased, or the nature of its activities makes such qualification
necessary, except where the failure to be so qualified will not have a
Material Adverse Effect. The Corporation Disclosure Letter sets forth
a list of all of the Subsidiaries of the Corporation and any other
Person in which the Corporation or a Subsidiary holds an interest,
including the jurisdiction of incorporation or organization and the
ownership interest of the Corporation or a Subsidiary in such Persons.
(b) Capitalization. The authorized capital of the Corporation consists of
an unlimited number of Common Shares and an unlimited number of
special shares, issuable in series, of which 51,786 Series D special
shares are authorized. As of the date hereof, there are 55,945,584
Common Shares, and no special shares in the capital of the Corporation
issued and outstanding. Except as set forth in the Corporation
Disclosure Letter, there are no options, warrants, conversion
privileges or other rights, agreements, arrangements or commitments
obligating the Corporation or any Subsidiary to issue or sell any
shares or other ownership interests of the Corporation or any of its
Subsidiaries or securities or obligations of any kind convertible into
or exchangeable for any shares or other ownership interests of the
Corporation or any Subsidiary, nor are there outstanding any stock
appreciation rights, phantom equity or similar rights, agreements,
arrangements or commitments based upon the book value, income or any
other attribute of the Corporation or any of its Subsidiaries. All
outstanding securities of the Corporation have been duly authorized
and are validly issued and outstanding as fully paid and
non-assessable securities and have been issued in compliance with all
Applicable Laws and pre-emptive rights. There are no outstanding
bonds, debentures or other evidences of indebtedness of the
Corporation or any Subsidiary having the right to vote (or that are
convertible for or exercisable into securities having the right to
vote) on any matter. There are no outstanding contractual obligations
of the Corporation or any of its Subsidiaries or, to the knowledge of
the Corporation, any other Person to repurchase, redeem or otherwise
acquire any of the outstanding securities of the Corporation or any of
its Subsidiaries or with respect to the voting or disposition of any
outstanding securities of the Corporation or any of its Subsidiaries.
(c) Authority and No Violation.
(i) The Corporation has the requisite corporate power and authority to
enter into this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement by the
Corporation and the consummation by the Corporation of the
transactions contemplated by this Agreement have been duly
authorized by the Board and no other corporate proceedings on the
part of the Corporation are necessary to authorize this Agreement
or the transactions contemplated hereby other than:
(A) with respect to the Circular, the calling of the Special
Meeting and other matters relating solely to the implementation
of the Arrangement, the approval of the Board; and
(B) with respect to the completion of the Arrangement, subject to
the Interim Order, the approval of at least two-thirds of the
votes cast by the Securityholders present in person or
represented by proxy at the Special Meeting with Convertible
Securityholders and Shareholders voting together as one class
and the approval of a majority of the Minority Shareholders
present in person or represented by proxy at the Special
Meeting.
(ii) This Agreement has been duly executed and delivered by the
Corporation and constitutes a valid and binding obligation of the
Corporation, enforceable against the Corporation in accordance
with its terms.
D-39
(iii) Each of the Independent Committee and the Board has (A) determined
that the Arrangement is fair from a financial point of view to the
Shareholders (other than MDS and its affiliates and associates)
and is in the best interests of the Corporation and to so
represent in the Circular, (B) received an oral opinion from KPMG
that the consideration to be received by the Shareholders (other
than MDS and its affiliates and associates) pursuant to the
Arrangement is fair from a financial point of view to such
Shareholders, (C) determined to support and to recommend that the
Shareholders vote in favour of the Arrangement Resolution and to
make such recommendation in the Circular; and (D) advised the
Corporation that the members of the Board that attended the
meeting to consider the foregoing intend to vote the Common Shares
held by them in favour of the Arrangement and to so represent in
the Circular.
(iv) Except as set forth in the Corporation Disclosure Letter, the
approval of this Agreement, the execution and delivery by the
Corporation of this Agreement and the performance by it of its
obligations hereunder including the completion of the Arrangement
will not: (A) result in a violation or breach of any provision of,
require any consent to be obtained under or give rise to any
termination rights or payment obligation under any provision of (I)
its or any of its Subsidiaries' certificate of incorporation,
articles, by-laws, or other charter documents, including any
unanimous shareholder agreement or any other agreement or
understanding with any party holding an ownership interest in any
Subsidiary, (II) any agreement, contract, license, franchise or
permit to which it or any of its Subsidiaries is a party or
beneficiary other than where such violation or breach, consent,
termination right or payment obligation alone or in the aggregate
would not result in a Material Adverse Effect on the Corporation,
or (III) any law, regulation, order, judgement or decree to which
it or any of its Subsidiaries is subject or by which it or any of
its Subsidiaries is bound; (B) give rise to any right of
termination or any payment, or acceleration of indebtedness, or
cause any indebtedness to come due before its stated maturity, or
give rise to any rights of first refusal or other buy-sell rights
or change in control or influence or reversion rights or any
restriction or limitation under, any agreement, contract, license,
franchise or permit to which it or any of its Subsidiaries is a
party other than where such right, acceleration or restriction
alone or in the aggregate would not result in a Material Adverse
Effect on the Corporation; or (C) result in any payment (including
severance, unemployment compensation, golden parachute, bonus or
otherwise) becoming due to any director, officer or employee of the
Corporation or any of its Subsidiaries or increase any benefits
otherwise payable under any Benefit Plans or result in the
acceleration of time of payment or vesting of any such benefits.
(d) No Default. Neither the Corporation nor any of its Subsidiaries is in
default under, and there exists no event, condition or occurrence
which, after notice or lapse of time or both, would constitute such a
default or would give rise to a right to termination under any
contract, agreement, licence or franchise to which it is a party which
default or termination would cause a Material Adverse Effect on the
Corporation.
(e) Absence of Changes. Since December 31, 2002, except as has been
publicly disclosed in any publicly available document filed with the
Ontario Securities Commission by the Corporation:
(i) the Corporation and its Subsidiaries have not incurred any
liabilities or obligations of any nature (whether absolute,
accrued, contingent or otherwise) which would, individually or in
the aggregate, have a Material Adverse Effect on the Corporation;
and
(ii) the Corporation has not effected any material change in its
accounting methods, principles or practices.
(f) Employment Agreements. Other than as set forth in the Corporation
Disclosure Letter:
(i) neither the Corporation nor any of its Subsidiaries is a party to
any written or oral policy, agreement, obligation or understanding
providing for severance or termination payments to any Person;
(ii) neither the Corporation nor any of its Subsidiaries is bound by or
a party to any collective bargaining contracts with any trade
union, council of trade unions, employee bargaining agent or
affiliated bargaining agent;
D-40
(iii) neither the Corporation nor any of its Subsidiaries is subject to
any claim for wrongful dismissal, constructive dismissal or any
other tort claim, actual or, to its knowledge, threatened, or any
litigation, actual or, to its knowledge, threatened, relating to
employment or termination of employment of employees or
independent contractors; and
(iv) the Corporation and its Subsidiaries have operated in accordance
with all Applicable Laws with respect to employment and labour,
including, but not limited to, employment and labour standards,
workplace safety and insurance, pay equity, workers' compensation,
human rights and labour relations and there are no current, pending
or, to the knowledge of the Corporation, threatened proceedings
before any board or tribunal with respect to any employment or
labour matters.
(g) Pension and Employee Benefits. All the Benefit Plans of the
Corporation and its Subsidiaries are set forth in the Corporation
Disclosure Letter. None of the Corporation or any of its Subsidiaries
currently has or has ever had a defined benefit pension plan.
All agreements and undertakings by the Corporation or any of its
Subsidiaries to provide post-retirement profit sharing, medical, health,
life insurance or other benefits to any present or former employee of the
Corporation or any of its Subsidiaries are disclosed in the Corporation
Disclosure Letter.
(h) Books and Records. The corporate records and minute books of the
Corporation and its Subsidiaries have been maintained substantially in
accordance with Applicable Laws and are complete and accurate in all
material respects. Financial books and records and accounts of the
Corporation and its Subsidiaries in all material respects: (i) have
been maintained in accordance with good business practices on a basis
consistent with prior years; (ii) are stated in reasonable detail and
accurately and fairly reflect the transactions and dispositions of
assets of the Corporation and its Subsidiaries; and (iii) accurately
and fairly reflect the basis for the consolidated financial statements
of the Corporation.
(i) Financial Statements. The Audited Financial Statements and the
Unaudited Financial Statements were prepared in accordance with
generally accepted accounting principles in Canada consistently
applied, and fairly present the consolidated financial condition of
the Corporation at the respective dates indicated and the
consolidated results of operations of the Corporation for the periods
covered by such statements and reflect appropriate and adequate
reserves in respect of contingent liabilities, if any, of the
Corporation and its Subsidiaries.
(j) No Indebtedness. Other than the indebtedness set forth in the
Corporation Disclosure Letter, the Audited Financial Statements and
the Unaudited Financial Statements, the Corporation and its
Subsidiaries do not have any outstanding indebtedness for borrowed
money.
(k) Guarantees and Loans. The Corporation does not have any loans
outstanding to any Person. Other than as set forth in the Corporation
Disclosure Letter, none of the Corporation or its Subsidiaries has
given or agreed to give, nor is it a party to or bound by, any
guarantee of indebtedness, indemnity or suretyship or other
obligations of any Person, nor is it contingently responsible for such
indemnity or suretyship or obligations.
(l) Litigation, etc. Except as set forth in the Corporation Disclosure
Letter, there is no claim, action, proceeding or investigation
("PROCEEDINGS") pending or, to the knowledge of the Corporation after
due inquiry, threatened against or relating to the Corporation or any
of its Subsidiaries or affecting any of their properties, licences or
assets, including in respect of Clinical Programs or by participants
in Clinical Programs, before any court or governmental or regulatory
authority or body that, if adversely determined, is reasonably likely
to result in damages in the aggregate in excess of $100,000 or
injunctive relief or prevent or materially delay consummation of the
transactions contemplated by this Agreement or the Arrangement or
prevent the Corporation from carrying out its obligations in
connection with the Arrangement, nor is the Corporation aware of any
facts or circumstances that would form the basis for any such claim,
action, proceeding or investigation. Neither the Corporation nor any
of its Subsidiaries is subject to any outstanding order, writ,
injunction or decree that is or is reasonably likely to have a
Material Adverse Effect on the Corporation or that involves or may
involve, or restricts or may restrict, or requires or may require, the
expenditure of an amount of money that is in excess of $100,000, or
prevent or materially delay consummation of the transactions
contemplated by this Agreement or prevent the Corporation from
carrying out in any material respect its obligations in connection
with the Arrangement.
D-41
(m) Intellectual Property Rights. The Corporation is not aware of a claim
of any infringement or breach of any Intellectual Property of any other
Person by any of the Corporation or a Subsidiary and none of the
Corporation or a Subsidiary has received any notice that any of the
Corporation or a Subsidiary is infringing upon or breaching any
Intellectual Property rights of any other Person.
(n) Compliance with Laws. Each of the Corporation and its Subsidiaries
has complied with and is not in violation of any requirements of
Applicable Laws, including securities laws and stock exchange rules
other than where a violation will not have a Material Adverse Effect
on the Corporation.
(o) Disclosure Record. Other than as set out in the Corporation
Disclosure Letter, the Corporation has made all filings required to be
made by it under applicable securities laws and stock exchange rules.
The public filings made by the Corporation, since December 31, 2002,
under the provisions of applicable securities laws as of the dates of
such filings (i) do not contain any misstatement of a material fact or
omit to state a material fact required to be stated therein or
necessary in order to make the statements made therein, in light of
the circumstances under which they were made, not misleading; and (ii)
complied with the requirements of applicable securities laws. The
Corporation has not filed any confidential material change or other
report or other document with any securities regulatory authorities or
stock exchange or other self-regulatory authority which at the date
hereof remains confidential other than an application to the Ontario
Securities Commission and Agence nationale d'encadement du secteur
financier dated December 17, 2003 in respect of an exemption from
valuation requirements, an application to certain of the Canadian
Securities Administrators dated January 9, 2004 in respect of an
exemption from audit requirements and an application to the United
States Securities Exchange Commission dated January 20, 2004 and an
application dated February 6, 2004 filed with NASDAQ. The Corporation
is a reporting issuer in good standing under the Securities Act and
the analogous legislation in each of the provinces of Canada and is in
material compliance with the by-laws, rules and regulations of the TSX
and NASDAQ.
(p) Description of Real Property. Other than the property located at 2535
Meadowpine Boulevard, Mississauga, Ontario, neither the Corporation
nor any Subsidiary owns any real property.
(q) Environmental.
(i) The Business is, and has always been, operated in compliance with
Environmental Law. Neither the Corporation nor any of its
Subsidiaries have received any written notice of non-compliance
with Environmental Law.
(ii) There are no outstanding orders, rulings, notices of violation or
potential liability, demands or directives issued by any
government authority against the Corporation or any of its
Subsidiaries under or pursuant to any Environmental Law, alleging
any liabilities or requiring any work, repairs, compensation,
construction, corrective action or capital expenditures by the
Corporation or any of its Subsidiaries; and to the best of the
knowledge of the Corporation or any of its Subsidiaries, after
appropriate inquiries and investigations, there are no facts that
would give rise to any such orders, rulings, notices, demands or
directives.
(iii) Neither the Corporation nor any of its Subsidiaries have caused,
permitted, or become aware of the Discharge of any Substance at,
on, from, under or to any real property owned by the Corporation
or used by the Corporation to carry out its Business (the
"PREMISES"), or the Discharge of a Substance from a facility or
property owned or operated by a third party, including any
previous owners or operators, for which the Corporation or any of
its Subsidiaries may have liability or that could have a Material
Adverse Effect.
(iv) To the best of the knowledge of the Corporation, after appropriate
inquiries and investigations, none of the following exist on, at,
in or under the Premises: (i) underground storage tanks; (ii)
asbestos-containing material in any form or condition; (iii)
polychlorinated biphenyls, including any polychlorinated biphenyls
on or in materials or equipment; (iv) lead; (v) urea formaldehyde;
or (vi) landfills or waste disposal areas.
(v) The Corporation has provided MDS with copies of Environmental
Compliance Reviews conducted in respect of the Premises by or on
behalf of the Corporation, any of its Subsidiaries or any other
Person in respect of the Premises.
D-42
(r) Regulatory Compliance. The clinical, pre-clinical and other studies
and tests (the "CLINICAL PROGRAMS") conducted by or on behalf of or
sponsored by the Corporation or any Subsidiary or in which the
Corporation, any Subsidiary or its products or product candidates have
participated were and, if still pending, are being conducted in
accordance with the medical and scientific research procedures
applicable thereto. The Corporation and each Subsidiary has operated
and currently is in compliance in all material respects with all
applicable rules, regulations and policies of Health Canada and the
U.S. Food and Drug Administration (collectively, the "REGULATORY
AUTHORITIES"). The Corporation has not received any notices or other
correspondence from the Regulatory Authorities or any other
governmental agency requiring the termination or suspension of any
Clinical Program. The Corporation has received an informed consent
letter from each participant in a Clinical Program.
(s) Tax Matters. Other than as set out in the Corporation Disclosure
Letter, in respect of the Corporation and its Subsidiaries:
(i) each has duly, and in a timely manner, filed all Tax Returns,
including any elections and designations required by or referred
to in any such Tax Return, which were required to be filed by it
with any governmental authority prior to the date hereof. Each
such return, including the financial statements annexed thereto,
was correct and complete when filed;
(ii) none has ever been required to file any Tax Return with, and has
never been liable to pay any Taxes to, any governmental authority
outside Canada except Hemosol (USA) Inc. which has filed U.S.
federal and state returns, and no claim has ever been made by a
governmental authority in a jurisdiction where Tax Returns are not
filed that it is or may be subject to the imposition of any Tax by
that jurisdiction;
(iii) each has withheld, and will continue until the Effective Date to
withhold, any Taxes which are required by any Applicable Law to be
withheld and has timely paid or remitted, and will continue until
the Effective Date to pay and remit, on a timely basis, the full
amount of any Taxes which have been or will be withheld, to the
relevant governmental authority;
(iv) each has paid, on a timely basis, all Taxes, including any amount
due on or before the Effective Date, including instalments or
prepayments of Taxes, which are required to have been paid to any
governmental authority, and no deficiency with respect to the
payment of any Taxes or Tax instalments has been asserted against
it by any governmental authority. Since the date of the Audited
Financial Statements, no liability has been incurred by the
Corporation or a Subsidiary, whether actual or contingent, for
Taxes, other than in the ordinary course of business. Other than
Taxes provided for as a current liability in the Audited Financial
Statements, no liability or obligation in respect of any Taxes for
any time, period or event on or before the Effective Date has been
incurred by the Corporation;
(v) there are no outstanding assessments, reassessments, audits or
other formal claim, and the Corporation has no knowledge of any
threatened or potential assessment or other proceedings,
negotiations or investigations, against either the Corporation or
the Subsidiaries. The Corporation is not aware of any contingent
liability for Taxes or any grounds for an assessment or similar
action;
(vi) all Tax Returns filed in Canada for taxation years ending on or
before December 31, 2001 have been assessed by the relevant
governmental authority;
(vii) none is a party to any agreement, waiver or arrangement with any
governmental authority which relates to any extension of time with
respect to the filing of any Tax Return, any payment of Taxes or
any assessment or similar notice and none is subject to liability
for Taxes of any other person;
(viii) no circumstances exist or have existed which have resulted in or
may result in the application of any of sections 79 to 80.04
(relating generally to debt forgiveness) of the Federal Tax Act;
(ix) the value of the consideration paid or received for the
acquisition, sale, transfer or provision of property or the
provision of services from or to a non-arm's length person was
equal to the estimated fair market value thereof;
D-43
(x) records or documents that meet the requirements of paragraphs
247(4)(a) to (c) of the Federal Tax Act have been made and obtained
with respect to all transactions and arrangements with persons not
dealing at arm's length within the meaning of the Federal Tax Act;
(xi) none has claimed any reserve for Tax purposes, if as a result of
such claim any amount could be included in income for a taxation
year ending after the Effective Date and none has made a payment,
nor is or may be obligated to make any payment, that may not be
deductible by virtue of section 67 or 78 of the Federal Tax Act or
any analogous provision;
(xii) there are no circumstances which have or could result in the
application, either before, on or after Effective Date, of section
17 or paragraph 214(3)(a) of the Federal Tax Act or any analogous
provision, either to the Corporation or the Subsidiaries; and
(xiii) each is duly registered with the Canada Customs and Revenue
Agency under Part IX of the Excise Tax Act (Canada). All input
tax credits claimed are justified and have been correctly
calculated and all registration, reporting, payment, collection
and remittance requirements in respect of Part IX of the Excise
Tax Act (Canada) and other federal, state and provincial sales
tax legislation have been complied with.
(t) Acquisition of Control. There has been no acquisition of control, for
purposes of the Federal Tax Act, of the Corporation.
(u) Undeducted Balances. The Undeducted Balances for the following
accounts of the Corporation as at December 31, 2002 are as set out
below:
<Table>
Federal Non-Capital Losses.................................. $ 19,109,073
Ontario Non-Capital Losses.................................. $ 57,300,553
Federal Scientific Research and Experimental Development
Deductions................................................ $186,300,852
Federal Investment Tax Credits.............................. $ 32,281,523
Ontario Scientific Research and Experimental Development
Deductions................................................ $186,300,852
</Table>
(v) Consents. No authorization, consent or approval of any governmental
agency, regulatory body, court or Person that is a party to a
Corporation Material Agreement is required in connection with the
execution, delivery or performance of this Agreement by the
Corporation or the consummation of the transactions contemplated
herein and in the Plan of Arrangement, except as set out in Exhibit
10.
(w) Material Agreements. Other than as set forth in the Corporation
Disclosure Letter, there are no agreements material to the conduct of
the Business (each a "CORPORATION MATERIAL AGREEMENT"). Except as
disclosed in the Corporation Disclosure Letter, no approval or consent
of any Person is needed in order to assign such agreements to the
Blood Products Limited Partnership and for such agreements to continue
in full force and effect following consummation of the transactions
contemplated hereby.
(x) Insurance. The Corporation and its Subsidiaries are in compliance
with the terms of their insurance policies in all material respects.
There are no claims by the Corporation or any of the Subsidiaries
under any such policy or instrument as to which any insurance company
is denying liability or defending under a reservation of rights
clause.
(y) Brokers. Except as set forth in the Corporation Disclosure Letter, no
broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission, or to the reimbursement of any of
its expenses, by the Corporation in connection with the transactions
contemplated herein and in the Plan of Arrangement.
(z) Paid Up Capital. The paid up capital (within the meaning of the
Federal Tax Act) of the Common Shares is not less than $200 million as
at the date hereof.
(aa) Tax Ruling. The Corporation has reviewed the submissions of MDS to
the Canada Customs & Revenue Agency in respect of the application for
the Tax Ruling, the Tax Ruling and the Supplemental Submissions and
all factual statements in such submissions and the Tax Ruling in
respect of the Corporation and its Subsidiaries are true and correct
in all material respects and there is no omission to state a material
fact that is required to make a statement therein in respect of the
Corporation or its Subsidiaries not misleading.
D-44
EXHIBIT 3
REPRESENTATIONS AND WARRANTIES OF MDS
MDS hereby represents and warrants to the Corporation that the following
are true and correct on the date hereof and acknowledges that the Corporation is
relying upon these representations and warranties in connection with the
entering into of this Agreement:
(a) Organization. MDS has been duly incorporated or formed under
applicable law, is validly existing and has the corporate or legal
power and authority to own the Labs Assets and conduct the Labs
Business as presently owned and conducted. MDS is duly qualified to
carry on the Labs Business in Ontario, except where the failure to be
so qualified will not have a Material Adverse Effect.
(b) Authority and No Violation. MDS has the requisite corporate power and
authority to enter into this Agreement and to perform its obligations
hereunder. The execution and delivery of this Agreement by MDS and the
consummation by MDS of the transactions contemplated by this Agreement
have been duly authorized by the board of directors of MDS and no
other corporate or shareholder proceedings on the part of MDS are
necessary to authorize this Agreement or the transactions contemplated
hereby except as expressly provided for in this Agreement. This
Agreement has been duly executed and delivered by MDS and constitutes
a valid and binding obligation of MDS, enforceable against MDS in
accordance with its terms. Other than as set forth in the MDS
Disclosure Letter, the approval of this Agreement, the execution and
delivery by MDS of this Agreement and the performance by it of its
obligations hereunder will not: (i) result in a violation or breach of
any material provision of (A) its certificate of incorporation,
articles, by-laws or other charter documents; (B) any agreement,
contract, license, franchise or permit to which MDS is a party or
beneficiary other than where such violation or breach would not result
in a Material Adverse Effect, or (C) any law, regulation, order,
judgement or decree to which MDS is subject or by which MDS is bound;
(ii) give rise to any right of termination, or acceleration of
indebtedness, or cause any indebtedness to come due before its stated
maturity, or give rise to any rights of first refusal or other
buy-sell rights or change in control or influence or any restriction
or limitation under, any agreement, contract, license, franchise or
permit to which MDS is a party other than where such right,
acceleration or restriction would not result in a Material Adverse
Effect on the Labs Business; (iii) result in the imposition of any
encumbrance, charge or lien upon any of the assets of MDS; or (iv)
result in any payment (including severance, unemployment compensation,
golden parachute, bonus or otherwise) becoming due to any director,
officer or employee of MDS or increase any benefits otherwise payable
under any Benefit Plans of MDS or result in the acceleration of time
of payment or vesting of any such benefits.
(c) No Default. MDS is not in default under, and there exists no event,
condition or occurrence which, after notice or lapse of time or both,
would constitute such a default under, any contract, agreement,
licence or franchise to which it is a party which default would cause
a Material Adverse Effect on the Labs Business.
(d) Litigation, etc. There is no claim, action, proceeding or
investigation pending or, to the knowledge of MDS, threatened against
or relating to MDS or affecting any of its properties, licences or
assets before any court or governmental or regulatory authority or
body that, if adversely determined, is reasonably likely to prevent or
materially delay consummation of the transactions contemplated by this
Agreement or the Arrangement or prevent MDS from carrying out its
obligations in connection with the Arrangement, nor is MDS aware of
any facts or circumstances that would form the basis for any such
claim, action, proceeding or investigation. Other than as set out in
the MDS Disclosure Letter, MDS is not subject to any outstanding
order, writ, injunction or decree that is or is reasonably likely to
have a Material Adverse Effect on the Labs Business, that involves or
may involve, or restricts or may restrict, or requires or may require,
the expenditure of an amount of money for the Labs Business that is in
excess of $1,000,000 as a condition to or a necessity for the right or
ability of MDS to conduct its Labs Business in any manner in which it
has been carried on prior to the date hereof, or prevent or materially
delay consummation of the transactions contemplated by this Agreement,
or the Arrangement, or prevent MDS from carrying out in any material
respect its obligations in connection with the Arrangement.
(e) Restrictions on Business Activities. There is no agreement, judgment,
injunction, order or decree binding upon MDS that has or could
reasonably be expected to have the effect of prohibiting, restricting
D-45
or materially impairing any business practice of MDS' Labs Business or
the conduct of the Labs Business, as currently conducted.
(f) Consents. No authorization, consent or approval of any governmental
agency, regulatory body, court or Person that is a party to a Labs
Material Agreement is required in connection with the execution,
delivery or performance of this Agreement by MDS or the consummation
of the transactions contemplated herein and in the Plan of
Arrangement, except as set out in Exhibit 11.
(g) Compliance with Law. MDS has conducted the Labs Business in
compliance in all material respects with the requirements of
Applicable Laws and is not in material violation thereof.
(h) Brokers. No broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission, or to the
reimbursement of any of its expenses, by the Corporation in connection
with the transactions contemplated herein and in the Plan of
Arrangement.
(i) Financial Statements. The Labs Financial Information represents, in
all material respects, the results of operations attributable to the
Labs Business for the periods indicated therein.
(j) Employees. Other than as set forth in the MDS Disclosure Letter, all
employees and medical directors employed by MDS solely in the Labs
Business as at December 31, 2003 were transferred to Subco effective
January 1, 2004.
(k) Material Agreements. There are no agreements material to the conduct
of the Labs Business (each a "LABS MATERIAL AGREEMENT").
(l) Sufficiency of Assets. Other than as set forth in the MDS Disclosure
Letter, following the transfer of the Labs Assets by MDS to the Labs
Limited Partnership in accordance with the Labs Contribution
Agreement and the issuance of licences by the Ontario Ministry of
Health under the Licensing Act to the Labs Limited Partnership in
respect of each of the Labs Leased Locations, the Labs Limited
Partnership shall be entitled to receive all revenues from the
Ontario Ministry of Health in respect of the Labs Business.
D-46
EXHIBIT 4
ESCROW AGREEMENT TERMS
PARTIES
The Corporation, New Hemosol and CIBC Mellon Trust Company, or such other
escrow agent mutually acceptable to the Corporation and New Hemosol, acting
reasonably (the "ESCROW AGENT").
ESCROWED FUNDS
$1,000,000 (the "ESCROWED FUNDS") to be contributed by New Hemosol at the
Effective Time.
TERM
The Escrowed Funds shall be retained by the Escrow Agent until all
indemnifiable claims made by the Corporation under the Corporation Indemnity
Agreement (each a "CLAIM") within one year following the Effective Date (the
"CLAIM PERIOD") have been resolved by agreement between the Corporation and New
Hemosol or have become subject to a final non-appealable order of a court having
jurisdiction over the matter in dispute, as applicable.
INVESTMENT OF ESCROWED FUNDS
The Escrowed Funds will be deposited in a segregated interest bearing trust
account (the "ACCOUNT") established for such purpose by the Escrow Agent. The
Escrow Agent will invest the funds as New Hemosol and the Corporation jointly
instruct failing which the deposit will earn interest at the Escrow Agent's
customary rate. Interest earned on the funds on deposit in the Account shall be
retained in the Account.
RELEASE OF ESCROWED FUNDS
The Corporation shall deliver a notice (a "CLAIM NOTICE") to the Escrow
Agent and New Hemosol within 15 Business Days of the expiry of the Claim Period
which Claim Notice will identify all Claims that arise within the Claim Period.
Upon the expiry of such 15 Business Day period, provided that the
Corporation has not delivered a Claim Notice to the Escrow Agent and New Hemosol
or the Corporation has delivered a Claim Notice and the Claims subject to the
Claim Notice aggregate less than $1,000,000, the Escrow Agent will release to
New Hemosol the funds in the Account less an amount equal to the aggregate
amount of all Claims identified in the Claim Notice together with accumulated
interest on such aggregate amount (collectively, the "RETAINED AMOUNT"), and
shall retain that portion of the Retained Amount applicable to each particular
Claim until such Claim has been dealt with in accordance with the provisions
described below.
If the Corporation delivers a Claim Notice to New Hemosol and the Escrow
Agent within 15 Business Days of the expiry of the Claim Period, the Escrow
Agent shall pay out to the Corporation the amount of the relevant Claim on the
20(th) Business Day following receipt of such Claim Notice from the amounts on
deposit in the Account unless New Hemosol objects in writing within such 20
Business Day period.
If New Hemosol objects to any Claim specified in the Claim Notice, the
Escrow Agent shall not release the funds in respect of such Claim until it has
received (a) a joint direction of New Hemosol and the Corporation to release the
applicable funds, or (b) a final non-appealable order of a court having
jurisdiction over the matter in dispute.
Upon the final resolution of all Claims and all payments in respect
thereof, if any, have been made by the Escrow Agent to the Corporation, the
Escrow Agent shall release the balance of the Account (including accumulated
interest on such balance), if any, to New Hemosol.
DUTIES OF ESCROW AGENT
The Escrow Agent shall be subject to standard commercially reasonable
duties and obligations customary for escrow agreements of this nature.
D-47
REMUNERATION AND INDEMNITY OF ESCROW AGENT
New Hemosol and the Corporation shall each be responsible for one-half of
the reasonable fees and expenses of the Escrow Agent.
New Hemosol and the Corporation shall provide customary indemnities to the
Escrow Agent.
D-48
EXHIBIT 5
BLOOD PRODUCTS LP AGREEMENT
HEMOSOL LP
-------------------------------------------------
LIMITED PARTNERSHIP AGREEMENT
-------------------------------------------------
-- , 2004
D-49
HEMOSOL LP
LIMITED PARTNERSHIP AGREEMENT
THIS AGREEMENT made the -- day of -- , 2004,
B E T W E E N:
HEMOSOL CORP.,
a corporation existing under the laws of
the Province of Ontario,
(hereinafter referred to as the "GENERAL
PARTNER"),
- and -
HEMOSOL INC. (to be renamed -- ),
a corporation existing under the laws of
the Province of Ontario,
(hereinafter referred to as the "INITIAL
LIMITED PARTNER").
WHEREAS the General Partner and the Initial Limited Partner wish to enter
into this agreement to govern the business and affairs of Hemosol LP;
NOW THEREFORE THIS AGREEMENT WITNESSES that, in consideration of the
respective covenants and agreements hereinafter contained, the parties agree as
follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINED TERMS
For all purposes of this Agreement, except as otherwise expressly provided
herein or unless the context otherwise requires, the following terms have the
following meanings:
"ACCEPTANCE DATE" has the meaning set out in Section 9.4;
"ACT" means the Limited Partnerships Act (Ontario), as amended or replaced
from time to time;
"AFFILIATE" has the meaning given to that term in the Business Corporations
Act (Ontario) as in effect on the date of this Agreement;
"AGREEMENT" means this agreement, as amended, modified or supplemented from
time to time;
"ARRANGEMENT" means the arrangement under section 182 of the Business
Corporations Act (Ontario) involving the Initial Limited Partner, its
shareholders and MDS Inc. consummated in accordance with the order of the
Superior Court of Justice of Ontario dated -- , 2004;
"ASSUMED LIABILITIES" means the obligations and liabilities of the Initial
Limited Partner assumed by the Partnership pursuant to the Contribution
Agreement;
"BUSINESS" has the meaning set out in Section 2.3;
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a statutory
or civic holiday in Toronto, Ontario;
"CAPITAL ACCOUNT" has the meaning set out in Section 4.3;
"CONTRIBUTION AGREEMENT" means the contribution agreement dated the
Effective Date between the Partnership and the Initial Limited Partner;
"CONVERTIBLE SECURITIES" means securities of the Initial Limited Partner
that are convertible or exercisable or otherwise give the holder the right
to acquire common shares or other securities of the Initial Limited Partner;
"DATE OF CLOSING" has the meaning set out in Section 9.8;
D-50
"DECLARATION" means a declaration filed pursuant to the Act, establishing
the Partnership as a limited partnership, as the same may be amended from
time to time;
"DISTRIBUTION" means any distribution of cash or other assets of the
Partnership to any Partner;
"EFFECTIVE DATE" means the date on which the Arrangement becomes effective
as established by the date of issue shown on the certificate of arrangement
issued pursuant to section 183 of the Business Corporations Act (Ontario);
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the Effective Date;
"ESCROW RELEASE FUNDS" means any amounts released from escrow to the General
Partner pursuant to the escrow agreement dated the Effective Date between
the General Partner, the Initial Limited Partner and #;
"FAIR MARKET VALUE" has the meaning set out in Section 10.1;
"FISCAL YEAR" means the fiscal year of the Partnership as determined in
accordance with Section 2.7;
"GAAP" means generally accepted accounting principles as approved from time
to time by the Canadian Institute of Chartered Accountants or any successor
body, consistently applied;
"INDEPENDENT VALUATOR" has the meaning set out in Section 10.1;
"LIMITED PARTNERS" means the Initial Limited Partner and any additional
limited partners of the Partnership admitted in accordance with Section 5.8
but excludes any persons that have ceased to be limited partners of the
Partnership pursuant to Section 5.8(b);
"NET INCOME" or "NET LOSS", in respect of any period, means, respectively,
the net income or net loss of the Partnership in respect of such period as
determined in accordance with GAAP;
"OFFER" has the meaning set out in Section 9.4;
"OFFER PRICE" has the meaning set out in Section 9.4;
"OFFERED UNITS" has the meaning set out in Section 9.4;
"ORIGINAL ASSETS" means the assets transferred by the Initial Limited
Partner to the Partnership pursuant to the Contribution Agreement;
"PARTNERS" means the General Partner and the Limited Partners;
"PARTNERSHIP" means the limited partnership formed and organized under the
Act pursuant to this Agreement and the filing of the Declaration;
"PATIENT RECORDS" has the meaning set out in Section 10.2;
"PERSON" means an individual, corporation, partnership, joint venture,
association, syndicate, trust, unincorporated organization or other entity
or any trustee, executor, administrator or other legal representative;
"PURCHASE PRICE" has the meaning set out in Section 9.8;
"PURCHASED UNITS" has the meaning set out in Section 9.8;
"RECEIVER" has the meaning set out in Section 8.2;
"REGISTER" has the meaning set out in Section 6.9;
"SELLING LIMITED PARTNER" has the meaning set out in Section 9.4;
"TAG-ALONG EXPIRY PERIOD" has the meaning set out in Section 9.6;
"TAG-ALONG NOTICE" has the meaning set out in Section 9.6;
"TAG-ALONG OFFER" has the meaning set out in Section 9.6;
"TAX ACT" means the Income Tax Act (Canada), as amended or replaced from
time to time;
"THIRD PARTY PURCHASER" has the meaning set out in Section 9.6;
"TIME OF CLOSING" has the meaning set out in Section 9.8; and
"UNITS" has the meaning set out in Section 3.1.
D-51
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into Articles and Sections and the insertion
of headings are for reference purposes only and shall not affect the
interpretation of this Agreement. Unless otherwise indicated, any reference in
this Agreement to an Article or Section refers to the specified Article or
Section of this Agreement.
1.3 NUMBER AND GENDER
Words importing the singular number only shall include the plural and vice
versa. Words importing gender shall include all genders.
1.4 BINDING NATURE
This Agreement shall inure to the benefit of and shall be binding on and
enforceable by the parties and, where the context so permits, their respective
successors and permitted assigns.
1.5 AMENDMENT AND WAIVERS
No amendment or waiver of any condition or provision of this Agreement
shall be binding on either Partner unless consented to in writing by that
Partner. No waiver of any condition or provision of this Agreement shall
constitute a waiver of any other condition or provision, nor shall any waiver
constitute a continuing waiver unless otherwise expressly provided.
1.6 CURRENCY
All references to dollar amounts in this Agreement are to Canadian currency
unless otherwise specified.
ARTICLE 2
FORMATION OF PARTNERSHIP
2.1 FORMATION
The General Partner and the Initial Limited Partner hereby agree to form a
limited partnership under the provisions of the Act. The rights, restrictions
and liabilities of the Partners shall be as provided in the Act, except to the
extent otherwise provided in this Agreement.
2.2 NAME
The name of the Partnership shall be "Hemosol LP" or such other name as the
General Partner may determine from time to time. The Partnership may also use
the French form of any such name. The Partnership shall hold itself out as an
entity separate from any other Person or entity. The General Partner shall
notify the Limited Partners of any change in name of the Partnership.
2.3 BUSINESS OF PARTNERSHIP
The business of the Partnership (the "BUSINESS") shall be to engage in the
business that the Initial Limited Partner was engaged in immediately prior to
the Effective Time, to engage in such other business as may be determined by the
General Partner from time to time and to engage in all such activities and
exercise all such powers as the General Partner may determine to be ancillary or
incidental thereto or reasonably in furtherance thereof.
2.4 RECORDS OFFICE
The Partnership shall cause copies of the books and records of the
Partnership to be kept at 2585 Meadowpine Blvd., Mississauga, Ontario L5N 8H9,
or at such other location within Ontario as the General Partner may determine
from time to time. The location at which such copies are maintained from time to
time shall be deemed to be the Partnership's principal place of business in
Ontario for the purposes of the Act.
2.5 PLACE OF BUSINESS
The Partnership shall carry on its business at and from the Partnership's
principal place of business in Canada or such other place or places within
Canada as the General Partner may determine from time to time.
D-52
2.6 TERM
The term of the Partnership shall commence on the date hereof and shall
continue until terminated in accordance with this Agreement.
2.7 FISCAL YEAR
The first Fiscal Year of the Partnership shall end on December 31, 2004,
and thereafter each Fiscal Year shall commence on the 1st day of January in each
year and end on the 31st day of December of such year.
2.8 MAINTAINING STATUS OF THE PARTNERSHIP
The General Partner shall forthwith file on behalf of the Partnership the
Declaration under the Act and thereafter, on a timely basis whenever required,
any amendment thereto and shall do all things and cause to be executed and filed
such certificates, declarations, instruments and documents as may be required
under the laws of the Province of Ontario and the laws of any other jurisdiction
in which the Partnership may carry on business to reflect the constitution of
the Partnership. The General Partner and the Limited Partners shall execute and
deliver as promptly as possible any documents that may be necessary or desirable
to accomplish the purposes of this Agreement or to give effect to the formation
and continuance of the Partnership under any and all applicable laws. The
General Partner shall take all necessary actions in order to maintain the status
of the Partnership as a limited partnership under the Act and to maintain the
limited liability of the Limited Partners under the Act and the laws of any
other applicable jurisdictions.
2.9 TITLE TO PARTNERSHIP ASSETS
Title to any or all of the Partnership's assets shall be held in the name
of the General Partner as agent for the Partners or as the General Partner may
determine from time to time. The General Partner declares and warrants that,
regardless of the name in which title to the assets is held, all assets of the
Partnership shall be held solely for the use and benefit of the Partnership in
accordance with the provisions of this Agreement and all of the assets of the
Partnership shall be recorded as the property of the Partnership on its books
and records.
ARTICLE 3
UNITS AND INITIAL CONTRIBUTIONS
3.1 UNITS
The interests of the Partners in the Partnership shall be divided into and
represented by units (the "UNITS") of which an unlimited number are authorized,
each of which when issued shall represent an interest in the Partnership as
herein provided. The Partnership may issue fractional Units.
3.2 INITIAL CONTRIBUTIONS
(a) The Partners acknowledge and agree that the following transactions
shall occur on the Effective Date in accordance with the Arrangement:
(i) the General Partner shall subscribe for one Unit and shall pay the
sum of $6,000 as a capital contribution to the Partnership in full
satisfaction of the subscription price therefor;
(ii) pursuant to the Contribution Agreement, the Initial Limited
Partner shall transfer the Original Assets to the Partnership in
consideration for the issuance of 9,999 Units to the Initial
Limited Partner and the assumption by the Partnership of the
Assumed Liabilities;
(iii) the Initial Limited Partner shall transfer 9,112 of its 9,999
Units referred to in Section 3.2(a)(ii) to the General Partner in
consideration for the redemption of Class C preferred non-voting
shares in the capital of the Initial Limited Partner held by the
General Partner and the General Partner agreeing to issue
convertible securities to acquire shares in its capital to persons
holding Convertible Securities and the Capital Account of the
General Partner shall be deemed to be increased by the amount that
was added to the Capital Account of the Initial Limited Partner in
connection with the issuance of such Units and the Capital Account
of the Initial Limited Partner shall be reduced by such amount;
and
D-53
(iv) the General Partner shall subscribe for 2,500 Units and shall pay
the sum of $15,000,000 in full satisfaction of the subscription
price therefor.
(b) The Partners agree that the transactions referred to in Section 3.2(a)
shall only be effective upon the consummation of the Arrangement.
(c) Upon completion of the transactions referred to in Section 3.2(a), the
number of Units held by each of the Partners and the Capital Account
of each of the Partners shall be as follows:
<Table>
<Caption>
PARTNER NUMBER OF UNITS CAPITAL ACCOUNT
------- --------------- ---------------
General Partner............................................. 11,613 $69,678,000
Initial Limited Partner..................................... 887 $ 5,322,000
------ -----------
Total..................................................... 12,500 $75,000,000
====== ===========
</Table>
3.3 NATURE OF UNITS
Each Partner shall have the following rights:
(a) the right to allocations of Net Income or Net Loss and the right to
allocations of the taxable income or loss of the Partnership in
proportion to the number of Units held in accordance with Sections 4.1
and 4.2; and
(b) the right to participate in Distributions in proportion to the number
of Units held in accordance with Section 4.7.
Units shall not be represented by physical certificates.
3.4 EQUALITY OF UNITS
Notwithstanding the amount of capital recorded in a Partner's Capital
Account, each Unit shall entitle the holder thereof to the same rights and
obligations as the holder of any other Unit and no Partner shall be entitled to
any privilege, priority or preference in relation to any other Partner in
respect of its Units.
3.5 PLEDGE OF UNITS
The Limited Partners shall not mortgage, charge, assign, hypothecate,
pledge or otherwise create a security interest in respect of their Units. The
General Partner may, with the prior approval of the Limited Partners (such
approval not to be unreasonably withheld), mortgage, charge, assign,
hypothecate, pledge or otherwise create a security interest in respect of its
Units.
ARTICLE 4
ALLOCATIONS, CAPITAL ACCOUNTS, DISTRIBUTIONS AND ADDITIONAL
CAPITAL CONTRIBUTIONS
4.1 ALLOCATION OF NET INCOME OR NET LOSS
Net Income or Net Loss for a Fiscal Year shall be allocated among the
Partners in proportion to the number of Units held by each Partner at the end of
the Fiscal Year.
4.2 TAX ALLOCATIONS
The income and loss of the Partnership for income tax purposes for a Fiscal
Year shall be allocated to each Partner in proportion to the number of Units
held by each Partner at the end of the Fiscal Year. Each of the Partners agrees
to file its tax returns on a basis consistent with such allocation.
4.3 CAPITAL ACCOUNTS
There shall be established a capital account (a "CAPITAL ACCOUNT") for each
Partner, in which shall be recorded the following transactions:
(a) Where a Partner contributes additional capital to the Partnership,
there shall be added to the Partner's Capital Account an amount equal
to the amount, if any, by which the Fair Market Value of such
D-54
contribution exceeds the aggregate Fair Market Value of any
consideration (other than Units) received by the Partner from the
Partnership in respect of the contribution.
(b) Where a Partner receives property or money from the Partnership as a
return of capital from the Partnership, there shall be subtracted from
the Partner's Capital Account an amount equal to the Fair Market Value
of such property or money.
(c) There shall be added to each Partner's Capital Account the amount of
Net Income (if any) for any period allocated to such Partner in
accordance with Section 4.1.
(d) There shall be subtracted from each Partner's Capital Account the
amount of Net Loss (if any) for any period allocated to such Partner
in accordance with Section 4.1.
4.4 NO RIGHT TO WITHDRAW CAPITAL
No Partner shall have the right to receive any Distributions or otherwise
to withdraw any positive balance in its Capital Account except as expressly
provided in this Agreement.
4.5 NO INTEREST
No Partner shall be entitled to receive interest from the Partnership in
respect of any positive balance in its Capital Account and no Partner shall be
liable to pay interest to the Partnership in respect of any negative balance in
its Capital Account.
4.6 NEGATIVE OR ZERO BALANCE IN CAPITAL ACCOUNT
The interest of a Partner in the Partnership shall not terminate by reason
of there being a negative or zero balance in that Partner's Capital Account.
4.7 DISTRIBUTIONS
Distributions shall be made in such amounts and at such times as determined
by the General Partner in its sole discretion. All Distributions of the
Partnership shall be allocated to the Partners in proportion to the allocations
of Net Income in Section 4.1. The General Partner may reinvest cash generated by
the Partnership at any time in the Business in its sole discretion.
4.8 PARTNERSHIP ASSETS
The Partners shall look solely to the assets of the Partnership for any
Distributions, whether in connection with the dissolution of the Partnership or
otherwise. If the assets of the Partnership remaining after the payment or
discharge, or the provision for payment or discharge, of the debts, liabilities
and obligations of the Partnership are insufficient to make any Distributions,
no Partner shall have any recourse against the separate assets of the other
Partner.
4.9 ADDITIONAL CAPITAL CONTRIBUTIONS
(a) The Limited Partners shall not be entitled to make any capital
contributions to the Partnership in addition to the initial
contributions referred to in Section 3.2(a) unless the General Partner
otherwise agrees. The Limited Partners shall not be required to make
any additional capital contributions to the Partnership.
(b) The General Partner may, from time to time, make capital contributions
to the Partnership in cash or non-cash property.
(c) If a Partner makes a contribution of capital, the Partnership shall
issue Units to such Partner. The number of such Units to be issued to
such Partner shall be determined by dividing (i) the Fair Market Value
of such capital contribution by (ii) the Unit Value. The "UNIT VALUE"
shall be determined by dividing the Fair Market Value of the
Partnership immediately prior to the making of such capital
contribution by the number of Units outstanding as at such time
provided that the "Unit Value" for the purposes of any capital
contribution by the General Partner to the Partnership funded by the
Escrow Release Funds shall be $6,000. The General Partner shall
provide a notice to the Limited Partners of any such issuance
specifying the number of Units issued, the Unit Value and the
percentages that the Units
D-55
held by each Partner, following any such issuance, represents of the
aggregate number of Units outstanding, following any such issuance.
4.10 LOANS AND GUARANTEES
Subject to Section 6.20, the General Partner or Affiliates thereof may lend
to the Partnership such funds as determined by the General Partner and the
Partnership may, with the prior approval of the Limited Partners (such approval
not to be unreasonably withheld), lend to the General Partner or Affiliates
thereof such funds as determined by the General Partner. The Partnership may,
with the prior approval of the Limited Partners (such approval not to be
unreasonably withheld), guarantee the obligations or liabilities of the General
Partner or an Affiliate thereof and mortgage, charge, assign, hypothecate,
pledge or otherwise create a security interest in all or any of it assets or
property in connection therewith.
ARTICLE 5
THE LIMITED PARTNERS
5.1 LIMITATIONS OF AUTHORITY OF THE LIMITED PARTNERS
The Limited Partners shall not be entitled to:
(a) take part in the control or management of the business of the
Partnership or transact any business for the Partnership;
(b) execute any document or take any action pursuant to which it binds or
purports to bind the Partnership or the General Partner;
(c) undertake any obligation or responsibility on behalf of the
Partnership;
(d) hold themselves out as having or purport to have the power or
authority to bind the Partnership or the General Partner; or
(e) bring any action for partition, sale or otherwise in connection with
any interest in any property of the Partnership, whether real or
personal, or register, or permit to be filed or registered or remain
undischarged, against any property of the Partnership any lien or
charge in respect of the interest of the Limited Partners in the
Partnership.
5.2 LIMITED LIABILITY OF LIMITED PARTNERS
Subject to the provisions of the Act and any other specific assumption of
liability, the liability of each Limited Partner for the debts, liabilities and
obligations of the Partnership at any relevant time shall be limited to such
Limited Partner's capital contributions to the Partnership and shall not be
liable for any further claims, assessments or contributions to the Partnership.
The General Partner shall use reasonable means to inform all persons having
dealings with the Partnership of the limited liability of the Limited Partners.
5.3 INDEMNITY OF LIMITED PARTNERS BY GENERAL PARTNER
The General Partner shall indemnify and hold harmless each Limited Partner
from and against any and all actions, claims, costs, losses, liabilities,
damages or expenses (including reasonable legal fees) suffered or incurred by
such Limited Partner if the liability of such Limited Partner is not limited in
the manner provided for in this Agreement by reason of the acts or omissions of
the General Partner performed or omitted fraudulently or in bad faith or
attributable to the wilful misfeasance or gross negligence of the General
Partner, unless the liability of such Limited Partner is not so limited as a
result of or arising out of any act or omission of such Limited Partner.
5.4 COMPLIANCE WITH LAWS
On request by the General Partner, the Limited Partners shall promptly
execute such certificates and other documents necessary to comply with any law
or regulation of any jurisdiction for the continuation and good standing of the
Partnership.
D-56
5.5 QUALIFICATION OF THE LIMITED PARTNERS
Each of the Limited Partners represents, warrants, covenants and agrees
that it:
(a) is a corporation existing under the law of the Province of Ontario;
(b) has and shall continue to have the corporate power and authority to
perform its obligations under this Agreement, and such obligations do
not and will not conflict with or breach or result in a breach of any
of its constating documents and by-laws;
(c) is not a "non-resident" of Canada for the purposes of the Tax Act, a
"non-Canadian" for the purposes of the Investment Canada Act(Canada)
or a "financial institution" for the purposes of sections 142.2 to
142.6 of the Tax Act; and
(d) has not financed, and will not finance, its acquisition of Units with
a borrowing or other indebtedness for which recourse is or is deemed
to be limited for the purposes of section 143.2 of the Tax Act.
5.6 STATUS OF LIMITED PARTNERS
Each Limited Partner agrees that it will promptly provide evidence to the
General Partner upon request of its status under the Tax Act or any similar
statute affecting the status of the Partnership or of any other matter which
affects or may from time to time affect such status. If a Limited Partner
becomes a non-resident of Canada for the purposes of the Tax Act, the General
Partner may require such Limited Partner to cease to be a limited partner of the
Partnership and sell its Units to residents of Canada at a price equal to Fair
Market Value. In the event that a Limited Partner fails to comply with such a
request, the General Partner shall have the right to sell such Limited Partner's
Units or to purchase the same on behalf of the Partnership at a price equal to
Fair Market Value.
5.7 POWER OF ATTORNEY
Each Limited Partner hereby nominates, constitutes and appoints the General
Partner as such Limited Partner's true and lawful attorney and agent with full
power of substitution and authority, in such Limited Partner's name, place and
stead to do the following:
(a) make, execute, swear to, acknowledge, deliver and record or file, as
the case may be, any of the following:
(i) the Register, the Declaration or any other documents and
instruments required to qualify or continue the qualification of
the Partnership as a valid and subsisting limited partnership in
or otherwise to comply with the laws of any jurisdiction in which
the Partnership may from time to time conduct its business;
(ii) all conveyances, agreements and other instruments necessary or
desirable to reflect, facilitate and implement the dissolution and
termination of the Partnership including cancellation of any
certificates or declarations;
(iii) all elections, determinations, agreements or designations in
connection with the Business permitted or required under the Tax
Act or any other taxation or other legislation or law of like
import of Canada or of any provinces thereof or other
jurisdictions in respect of such Limited Partner's interest in
the Partnership or the affairs of the Partnership;
(b) execute and file with any governmental body or instrumentality thereof
any documents necessary to be filed in connection with the Partnership
or the Business; and
(c) execute and deliver all such documents or instruments on behalf of and
in the name of the Partnership and the Limited Partner as may be
deemed necessary by the General Partner to carry out fully the
provisions of this Agreement in accordance with its terms.
The power of attorney granted herein is irrevocable and subject to the
provisions of any relevant legislation, will survive the death, disability,
insolvency, incapacity to manage property or other legal incapacity of each
Limited Partner. Each Limited Partner agrees to be bound by all representations
or actions made or taken by the General Partner pursuant to this power of
attorney and hereby waives any and all defences which may be available to
contest, negate or disaffirm the action of the General Partner taken in good
faith under this power of attorney. The power of attorney granted herein shall
continue in respect of the General Partner as long as it is the general partner
of the Partnership and shall not revoke or terminate thereafter but shall
continue in respect of a successor general partner as if the successor was the
original attorney. The power of attorney granted herein shall not revoke or
terminate any
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general continuing power of attorney previously granted by a Limited Partner and
shall not be revoked or terminated by any general continuing power of attorney
hereinafter granted by a Limited Partner.
5.8 NEW LIMITED PARTNERS
(a) The General Partner shall be authorized to admit any Person as a
limited partner of the Partnership provided that such Person satisfies
the qualifications referred to in Section 5.5.
(b) Upon the transfer of Units by a Limited Partner as permitted by
Article 9, the Register shall be amended to reflect the admission of
such transferee of Units as a limited partner of the Partnership, the
transferee shall become a limited partner of the Partnership and shall
have all of the rights and powers and shall be subject to all of the
restrictions and liabilities of the transferor in respect of the
acquired Units, except any liability of which such transferee did not
have notice of at the time it became a limited partner of the
Partnership and which could not be ascertained from this Agreement,
the Declaration or the Register. Unless the transferor continues to
hold any Units following such transfer, the transferor of the Units
shall thereupon cease to be a limited partner of the Partnership,
provided, however, that the transferor shall remain liable for all
defaults or liabilities which accrued or were payable by it while it
was a limited partner of the Partnership.
ARTICLE 6
THE GENERAL PARTNER
6.1 AUTHORITY OF THE GENERAL PARTNER
Except as otherwise provided herein, the General Partner is authorized to
carry on the Business in the name of and on behalf of the Partnership, with full
power and exclusive authority to administer, manage, control and operate the
business and affairs of the Partnership, and has all power and authority to do
any act, take any proceeding, make any decision and execute and deliver any
instrument, deed, agreement or document necessary for or incidental to carrying
out the Business for and on behalf of and in the name of the Partnership. No
Person dealing with the Partnership shall be required to inquire into the
authority of the General Partner to do any act, take any proceeding, make any
decision or execute and deliver any instrument, deed, agreement or document for
and on behalf of or in the name of the Partnership.
6.2 POWERS OF THE GENERAL PARTNER
Without limiting the generality of Section 6.1, the General Partner shall
have the full power and authority, to do on behalf and in the name of the
Partnership all things which, in its sole discretion, are necessary to carry on
the Business including, without limitation, the right, power and authority:
(a) to purchase or lease property or equipment for the Business;
(b) to manage, administer, conserve, develop, operate and dispose of any
and all properties or assets of the Partnership;
(c) to negotiate, execute and carry out, on behalf of the Partnership any
agreement in connection with the Business;
(d) to employ, retain, engage or dismiss from employment, personnel,
agents, representatives or professionals with the powers and duties
upon the terms and for the compensation as in the discretion of the
General Partner may be necessary or advisable in carrying out the
Business;
(e) to retain such legal counsel, accountants, experts, advisors or
consultants as the General Partner shall consider necessary or
advisable and to rely upon the advice of such Persons;
(f) to purchase liability and other insurance that the General Partner
considers necessary or advisable;
(g) to open and operate any bank, trust or investment account on behalf of
the Partnership and to designate from time to time the signatories to
such accounts;
(h) subject to Section 4.10, to borrow money on behalf of the Partnership
and to execute loan and credit agreements on behalf of the
Partnership;
(i) to invest funds not immediately required for the Business in such
investments as the General Partner may determine from time to time;
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(j) to pay all fees and expenses of the Partnership or incur such fees
and expenses of the Partnership;
(k) to commence and prosecute any suit or proceedings with respect to or
on behalf of the Partnership, its property or its business, take the
defence of the Partnership in any suit or proceedings taken against it
and to settle any such suit or proceedings;
(l) subject to Section 4.10, to mortgage, charge, assign, hypothecate,
pledge or otherwise create a security interest in all or any assets
or property of the Partnership now owned or hereafter acquired, to
secure any present and future borrowings, obligations, costs and
expenses of the Partnership, the General Partner or an Affiliate
thereof;
(m) to hold interests in partnerships or subsidiaries or other entities;
(n) to submit the Partnership to binding or non-binding arbitration or
mediation with respect to any issue arising in or concerning its
business or affairs;
(o) to appoint and remove agents and grant and rescind powers of attorney;
(p) to file any elections, determinations, designations or returns
required by any governmental or regulatory authority in respect of the
affairs of the Partnership or of a Partner's interest in the
Partnership;
(q) to retain and appoint an auditor of the Partnership; and
(r) to do anything that is in furtherance of or incidental to the Business
or that is provided for in this Agreement.
The General Partner shall use its best efforts, in the conduct of the
affairs of the Partnership, to put all Persons with whom the Partnership does
business on notice that the Partnership is a limited partnership and that the
Limited Partners are not liable for the obligations of the Partnership.
6.3 UNLIMITED LIABILITY OF GENERAL PARTNER
The General Partner shall have unlimited liability for the debts,
liabilities and obligations of the Partnership.
6.4 DUTY OF CARE
The General Partner shall exercise its power and discharge its duties under
this Agreement honestly, in good faith and in the best interests of the
Partnership and in connection therewith shall exercise the degree of care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances.
6.5 QUALIFICATIONS OF THE GENERAL PARTNER
The General Partner represents, warrants and covenants that it:
(a) is a corporation existing under the law of the Province of Ontario and
that so long as it is the General Partner of the Partnership it shall
maintain its corporate existence;
(b) has and shall continue to have the corporate power and authority to
act as a general partner of the Partnership and to perform its
obligations under this Agreement, and such obligations do not and will
not conflict with or breach or result in a breach of any of its
constating documents, by-laws or agreements to which it is bound;
(c) is not a "non-resident" of Canada for the purposes of the Tax Act, a
"non-Canadian" for the purposes of the Investment Canada Act(Canada)
or a "financial institution" for the purposes of sections 142.2 to
142.6 of the Tax Act;
(d) has and shall continue to have all licenses and permits necessary to
carry on its business as the general partner of the Partnership in all
jurisdictions where the activities of the general partner or the
Partnership require such licensing or other form of registration of
the General Partner; and
(e) has not financed, and will not finance, its acquisition of Units with
a borrowing or other indebtedness for which recourse is or is deemed
to be limited for the purposes of section 143.2 of the Tax Act.
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6.6 SAFEKEEPING OF ASSETS
The General Partner is responsible for the safekeeping and use of all funds
and assets of the Partnership, whether or not in its immediate possession or
control, and the General Partner shall not employ or permit any other Person to
employ such funds or assets in any manner except for the exclusive benefit of
the Partnership.
6.7 NO COMMINGLING OF PARTNERSHIP FUNDS
The funds of the Partnership shall be maintained in a separate bank account
and shall not be commingled with the funds of any other Person (including those
of the Partners).
6.8 CONDUCT OF BUSINESS -- LIMITED LIABILITY
The General Partner shall, at all times, conduct the business and affairs
of the Partnership in such a manner that the liability of the Limited Partners
will be limited to the fullest extent permitted by law.
6.9 REGISTER
The General Partner shall maintain a register (the "REGISTER") to record
the names and addresses of the Partners, the number of Units held by each
Partner, capital contributions and Capital Accounts of the Partners and
particulars of registration and transfers of Units at the principal office from
time to time of the General Partner in Canada, a duplicate copy of which shall
be made available for inspection in accordance with the Act at the location in
Ontario specified in Section 2.4.
6.10 REIMBURSEMENT OF EXPENSES
The Partnership shall reimburse the General Partner for all reasonable
costs and expenses incurred in the performance of its duties as general partner
hereunder but specifically excluding costs and expenses of any action, suit or
other proceedings in which, or in relation to which, the General Partner is
adjudged to have been grossly negligent or to have acted fraudulently, in bad
faith or with wilful misfeasance.
6.11 INDEPENDENT ACTIVITIES
The General Partner and the General Partner's directors, officers and
employees shall not be required to devote all of their business time to the
business of the Partnership but shall devote such time as may be necessary for
the discharge of the obligations and duties of the General Partner hereunder.
The General Partner shall have the right to engage in other business of any
kind, provided that such business is not in competition with the Business.
6.12 LIMITATION OF LIABILITY OF GENERAL PARTNER
Notwithstanding anything else contained in this Agreement, but subject to
compliance with Section 6.4, neither the General Partner nor its officers,
directors, shareholders, employees or agents are liable, responsible for or
accountable in damages or otherwise to the Partnership or a Limited Partner for
any action taken or failure to act on behalf of the Partnership believed by the
General Partner, acting reasonably, to be within the scope of the authority
conferred on the General Partner by this Agreement or by law unless the act or
omission was performed or omitted fraudulently or in bad faith or constituted
wilful misfeasance or gross negligence of the General Partner.
6.13 INDEMNITY OF GENERAL PARTNER BY PARTNERSHIP
The Partnership shall indemnify and hold harmless the General Partner and
its officers, directors, shareholders, employees or agents from and against any
losses, costs, expenses, liabilities and damages (including reasonable legal
fees) incurred by the General Partner by reason of acts, omissions or alleged
acts or omissions arising out of the activities of the General Partner on behalf
of the Partnership or in furtherance of the interest of the Partnership, but
only if the acts, omissions or the alleged acts or omissions in respect of which
any actual or threatened action, proceeding or claim are based, were performed
in good faith and were not performed or omitted in breach of this Agreement,
fraudulently or in bad faith or as a result of the wilful misfeasance or gross
negligence of the General Partner, its Affiliates, shareholders, officers,
directors, employees or agents. The indemnification herein provided for shall be
made from the assets of the Partnership and the Limited Partners shall not be
personally liable therefore.
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6.14 INDEMNITY OF PARTNERSHIP BY GENERAL PARTNER
The General Partner shall indemnify and hold harmless the Partnership from
and against any and all actions, claims, losses, costs, expenses, liabilities
and damages (including reasonable legal fees) suffered or incurred by the
Partnership by reason of the acts or omissions of the General Partner performed
or omitted fraudulently or in bad faith or attributable to the gross negligence
or wilful misfeasance of the General Partner.
6.15 DELEGATION BY GENERAL PARTNER
The General Partner may contract on behalf of itself or the Partnership
with any Person to carry out any of the duties of the General Partner and may
delegate to such Person any power and authority of the General Partner
hereunder, subject to the overall supervision of such Person by the General
Partner. No such contract or delegation shall relieve the General Partner of any
of its obligations hereunder. For greater certainty, subject to Section 6.20,
the General Partner may retain Affiliates of the General Partner on behalf of
the Partnership to provide goods and services to the Partnership.
6.16 RELIANCE
The General Partner may rely and act upon any statement, report or opinion
prepared by, or any advice received from, the auditor, legal counsel, experts or
other professional advisors of the General Partner or the Partnership, and,
provided the General Partner exercised reasonable care in selecting such
advisors, the General Partner shall not be responsible or held liable for any
loss or damage resulting from so relying or acting if the advice was within the
area of professional competence of the Person from whom it was received and the
General Partner acted in good faith and without negligence in relying thereon.
6.17 NO REMOVAL OF GENERAL PARTNER BY LIMITED PARTNERS
The General Partner may not be removed as the general partner of the
Partnership by the Limited Partners.
6.18 NO REMOVAL OF GENERAL PARTNER UPON INSOLVENCY
In the event of the bankruptcy, insolvency, passing of a resolution for the
dissolution, liquidation or winding-up of, making of an assignment for the
benefit of creditors or appointment of a trustee or receiver of the affairs of,
the General Partner, the General Partner shall not be deemed to have resigned as
general partner of the Partnership.
6.19 NO RESIGNATION OF GENERAL PARTNER EXCEPT IN CONNECTION WITH TRANSFER OF ALL
UNITS
(a) The General Partner shall not resign as general partner of the
Partnership, provided that it may resign if the following conditions
are satisfied:
(i) the General Partner transfers all (but not less than all) of its
Units to another Person (in compliance with Section 9.6) that: (A)
is not a "non-resident" of Canada for the purposes of the Tax Act;
(B) is not a "non-Canadian" for the purposes of the Investment
Canada Act (Canada); (C) is not a "financial institution" for the
purposes of sections 142.2 to 142.6 of the Tax Act; and (C) if
such Person is a partnership, is a "Canadian partnership" as
defined in the Tax Act; and
(ii) such Person to whom the General Partner's Units are transferred
agrees in writing to be bound by the provisions of this Agreement
as general partner of the Partnership as of the effective date of
the resignation of the General Partner and from that time forward,
for all purposes, assume the powers, duties and obligations of the
General Partner under this Agreement.
(b) Upon the resignation of the General Partner in accordance with Section
6.19(a):
(i) the Partnership shall pay all amounts payable by the Partnership
to the General Partner accrued to the effective date of
resignation;
(ii) subject to Section 6.13, the Partnership shall release and hold
harmless the resigning General Partner for all actions, claims,
costs, demands, losses, damages and expenses respecting events
relating to the Partnership and occurring after the effective date
of such resignation;
(iii) the resigning General Partner shall, at the Partnership's expense,
do all things and take all steps to transfer the administration,
management, control and operation of the business of the
Partnership, the assets of the Partnership and the books, records
and accounts of the Partnership to the new
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general partner and will execute and deliver all deeds,
certificates, declarations and other documents necessary or
desirable to effect such transfer in a timely fashion.
6.20 NON-ARM'S LENGTH TRANSACTIONS
The General Partner may retain or employ itself, an Affiliate of the
General Partner or any Person who does not deal at arm's length with the General
Partner on behalf of the Partnership to provide goods or services to the
Partnership or enter into any other transaction with itself, an Affiliate of the
General Partner or any other Person who does not deal at arm's length with the
General Partner on behalf of the Partnership, provided that such retention,
employment or other transaction has been entered into in good faith and on terms
no less favourable to the Partnership than those that could been obtained in a
comparable transaction by the Partnership on an arm's length basis with a third
party.
ARTICLE 7
BOOKS AND RECORDS AND FINANCIAL INFORMATION
7.1 BOOKS OF ACCOUNT
The General Partner shall keep and maintain, in the name and on behalf of
the Partnership, full, complete and accurate books of account and records of the
Partnership and the Business. The Partnership books shall be kept at the address
specified in Section 2.4. During the existence of the Partnership and for a
period of six years thereafter, such books of account and records shall be made
available for inspection by the Limited Partners or their duly authorized
representatives during normal business hours at the principal office of the
General Partner.
7.2 FINANCIAL STATEMENTS
The General Partner shall cause to be prepared and delivered to each
Limited Partner:
(a) within 140 days from the end of each Fiscal Year (or such shorter
period as may be required of reporting issuers to provide audited
annual financial statements to shareholders under applicable
securities laws), audited financial statements as at the end of and
for such Fiscal Year prepared in accordance with GAAP, including a
balance sheet of the Partnership as of the end of such Fiscal Year, a
statement of income or loss of the Partnership for such Fiscal Year
and a statement of cash flows of the Partnership for such Fiscal Year;
and
(b) within 60 days from the end of each fiscal quarter of the Partnership
(or such shorter period as may be required of reporting issuers to
provide unaudited quarterly financial statements to shareholders under
applicable securities laws), unaudited financial statements as at the
end of and for such fiscal quarter prepared in accordance with GAAP,
including a balance sheet of the Partnership as of the end of such
fiscal quarter, a statement of income or loss of the Partnership for
such fiscal quarter and a statement of cash flows of the Partnership
for such fiscal quarter.
7.3 INCOME TAX INFORMATION
Within 90 days after the end of each Fiscal Year, the General Partner shall
forward to each Limited Partner such information as is necessary to enable such
Limited Partner to file income tax returns with respect to its income from the
Partnership in respect of such Fiscal Year.
7.4 OTHER INFORMATION
From time to time and upon the request of a Limited Partner, the General
Partner shall forward to such Limited Partner such information regarding the
Partnership as is necessary to enable such Limited Partner in its opinion,
acting reasonably, to comply with its filing, disclosure and other obligations
under applicable laws, regulations, orders and policies.
7.5 INSPECTION OF DOCUMENTS
The General Partner shall keep a copy of this Agreement, the Declaration,
the Register and any other document required by the Act at the address specified
in Section 2.4.
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ARTICLE 8
DISSOLUTION OF PARTNERSHIP
8.1 EVENTS OF DISSOLUTION
The Partnership shall be dissolved on the earliest to occur of the
following events:
(a) the bankruptcy, passing of a resolution for the dissolution,
liquidation or winding-up of, making of an assignment for the benefit
of creditors of or appointment of a trustee or receiver over the
affairs of, the General Partner;
(b) the agreement of the Partners to dissolve the Partnership.
Any such dissolution will be effective on the day on which the event
occurred giving rise to the dissolution but the Partnership shall not terminate
until its assets have been distributed in accordance with this Agreement.
Notwithstanding any rule of law or equity to the contrary, the Partnership shall
not be dissolved except in accordance with this Agreement.
8.2 RECEIVER
On dissolution of the Partnership, the General Partner shall act as the
receiver (the "RECEIVER") of the Partnership. If the General Partner shall be
unable or unwilling to act as the Receiver, the Limited Partners shall appoint
the Receiver.
8.3 LIQUIDATION OF ASSETS
The Receiver shall prepare or cause to be prepared a statement of financial
position of the Partnership and shall forward such statement to the Partners.
The Receiver shall wind up the affairs of the Partnership and all property of
the Partnership shall be liquidated in an orderly manner. The Receiver shall
manage and operate the Partnership and shall have all the powers and authority
of the General Partner under this Agreement. The Receiver shall be paid its
reasonable fees and disbursements incurred in carrying out its duties as such.
8.4 DISTRIBUTION OF PROCEEDS OF LIQUIDATION
The Receiver shall distribute the net proceeds from liquidation of the
Partnership as follows:
(a) first, to pay the expenses of liquidation and the debts and
liabilities of the Partnership to its creditors or to make due
provision for payment thereof;
(b) second, to provide reserves which the Receiver considers reasonable
and necessary for any contingent or unforeseen liability or obligation
of the Partnership which shall be paid to an escrow agent to be held
for payment of liabilities or obligations of the Partnership; and
(c) third, to the Partners in proportion to the number of Units held by
each Partner.
8.5 TERMINATION OF PARTNERSHIP
The Partnership shall terminate when all of its assets have been sold and
the net proceeds therefrom, after payment of or due provision for the payment of
all debts, liabilities and obligations of the Partnership to creditors, have
been distributed as provided in this Article 8.
ARTICLE 9
TRANSFER OF UNITS
9.1 TRANSFER OF UNITS BY LIMITED PARTNERS
The Limited Partners shall not transfer all or any of their Units except in
compliance with this Article 9.
9.2 TRANSFER OF UNITS BY GENERAL PARTNER
Except as permitted by Section 6.19, the General Partner shall not transfer
all or any of its Units.
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9.3 TRANSFERS TO AN AFFILIATE
A Limited Partner or any Affiliate to which such Limited Partner has
previously transferred Units pursuant to this Section 9.3 may, without complying
with Section 9.4 (but on prior notice to the General Partner), transfer to an
Affiliate all (but not less than all) of its Units, provided the following
provisions are complied with:
(a) the transferee agrees in writing be bound by the provisions of this
Agreement as a Limited Partner;
(b) the transferee is not a "non-resident" of Canada for the purposes of
the Tax Act, a "non-Canadian" for the purposes of the Investment
Canada Act (Canada) or a "financial institution" for the purposes of
sections 142.2 to 142.6 of the Tax Act;
(c) the transferor shall not be relieved of any obligation or liability
under this Agreement as a result of the transfer; and
(d) the transferor and the transferee agree in writing that if the
transferee ceases to be an Affiliate of the transferor during such
time as the transferee continues to hold any Units, the transferee
shall reassign and retransfer to the transferor (or an Affiliate
thereof provided such Affiliate complies with the provisions of this
Section) the Units which were originally assigned and transferred to
it.
9.4 RIGHT OF FIRST OFFER
(a) In the event that any Limited Partner desires to transfer all or any
number of the Units owned by it (the "Selling Limited Partner"), it
shall first make an offer in writing (the "OFFER") to the General
Partner to transfer such Units (the "OFFERED UNITS") to the General
Partner. Such offer shall specify the number of Offered Units and the
price per Unit (the "OFFER PRICE") at which the Offered Units are
offered, and specifying a date which shall not be less than 30 days
nor more than 120 days following the Acceptance Date hereinafter
referred to, for closing of the purchase and sale of the Offered
Units. The General Partner may accept the Offer with respect to all,
but not less than all, of the Offered Units by giving a written
acceptance to the Selling Limited Partner within 30 days after the
General Partner's receipt of the Offer (the date of such acceptance
being the "ACCEPTANCE DATE"). In the event that no such acceptance is
received by the Selling Limited Partner from the General Partner
within such 30-day period, the Offer shall be deemed to have been
refused. If all the Offered Units are accepted by the General Partner,
then the Offer together with such acceptance shall constitute a
binding agreement of purchase and sale between the General Partner and
the Selling Limited Partner.
(b) If the General Partner does not accept all the Offered Units or the
Offer is deemed to have been refused, then the Selling Limited Partner
may transfer, at any time up to 120 days following the last day of the
30-day period in which the Offer could have been accepted by the
General Partner, all but not less than all, of the Offered Units to a
third party for cash consideration at a price per Unit not less than
the Offer Price and on other terms not more favourable to the third
party than the terms at which the Offered Units were offered to the
General Partner (including the provisions of this Article 9 that would
apply to the purchase of the Offered Units by the General Partner),
provided that no Units may be transferred to a third party unless and
until the third party enters into an agreement, in form and on terms
satisfactory to the General Partner, acting reasonably, prior to the
expiration of the 120-day period, by which the third party agrees to
be bound by the provisions of this Agreement in the same manner as the
Selling Limited Partner. If no such transfer to a third party is made
by the Selling Limited Partner within such 120-day period, the Selling
Limited Partner shall be required, before transferring any Units,
again to offer such Units as provided in this Section 9.4, and such
process shall be repeated so often as the Selling Limited Partner
desires to transfer any Units.
9.5 CLEAN-UP OPTION
(a) If at any time any Limited Partner holds 1% or less of the outstanding
Units the General Partner shall have the right to purchase all (but
not less than all) of the Units held by such Limited Partner at a
price equal to the Fair Market Value of such Units at the time of the
exercise of such right.
(b) The General Partner may exercise its rights in this Section 9.5 by
delivering a written notice to the relevant Limited Partner stating
that it is exercising its right pursuant to this Section 9.5 and
specifying
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the closing date for the purchase and sale of such Limited Partner's
Units which date shall not be less than 30 days nor more than 120 days
following the date of such notice.
9.6 TAG-ALONG RIGHT
(a) In the event the General Partner proposes to transfer all of its Units
to another Person that is not an Affiliate of the General Partner (a
"THIRD PARTY PURCHASER") in accordance with Section 6.19(a), the
General Partner may complete such transfer to the Third Party
Purchaser only if the Third Party Purchaser extends an offer (a
"TAG-ALONG OFFER") to all Limited Partners so that the Limited
Partners shall have the option to sell all (but not less than all) of
their Units to the Third Party Purchaser on the same terms (including
the same covenants, representations, warranties, indemnities and
consideration per Unit) and conditions as those applicable to the
General Partner.
(b) The General Partner shall forthwith give notice (a "TAG-ALONG NOTICE")
to the Limited Partners of any proposed transfer to the Third Party
Purchaser of its Units, which notice shall set out, in reasonable
detail, (i) information regarding the identity of the Third Party
Purchaser, (ii) a description of the rights of the Limited Partners
pursuant to this Section 9.6 and (iii) the Tag-Along Expiry Period
hereinafter referred to, and shall contain an offer from the Third
Party Purchaser to purchase all of the Limited Partners' Units on the
same terms (including the same covenants, representations, warranties,
indemnities and consideration per Unit) and conditions as those
applicable to the General Partner. The offer from the Third Party
Purchaser shall be irrevocable and shall be open for acceptance by the
Limited Partners for a period not less than 20 days after the date on
which the Tag-Along Notice is given (the "TAG-ALONG EXPIRY PERIOD") to
the Limited Partners.
(c) A Limited Partner may irrevocably accept the Tag-Along Offer by giving
notice to the General Partner prior to the expiry of the Tag-Along
Expiry Period, in which case such Limited Partner shall be obligated
to sell to the Third Party Purchaser all of its Units. The closing of
such sale shall be conditional on the closing of the transfer of Units
by the General Partner.
(d) If a Limited Partner does not exercise its right to accept the
Tag-Along Offer by delivering the notice contemplated by Section
9.6(c), the General Partner shall be entitled to transfer its Units to
the Third Party Purchaser on the terms set out in the Tag-Along
Notice, provided that no Units may be transferred to the Third Party
Purchaser unless and until the Third Party Purchaser enters into an
agreement in form and on terms satisfactory to the Limited Partners,
acting reasonably, by which the Third Party Purchaser agrees to be
bound by the provisions of this Agreement in the same manner as the
General Partner. If no such transfer to the Third Party Purchaser is
made by the General Partner on the terms set out in the Tag-Along
Notice, the General Partner shall be required, before transferring its
Units, again to comply with this Section 9.6, and such process shall
be repeated so often as the General Partner desires to transfer its
Units.
9.7 DRAG-ALONG RIGHT
If a Limited Partner does not exercise its right to sell its Units by
delivering the notice contemplated by Section 9.6(c), the General Partner may,
by giving notice to such Limited Partner within 10 days following the expiry of
the Tag-Along Expiry Period, require such Limited Partner to sell all (but not
less than all) of its Units to the Third Party Purchaser at the same time and on
the same terms (including the same covenants, representations, warranties,
indemnities and consideration per Unit) and conditions as those applicable to
the General Partner.
9.8 GENERAL PROVISIONS RELATING TO CERTAIN TRANSFERS
(a) In this Section 9.8, the term "PURCHASED UNITS" means any Units to be
purchased by the General Partner from a Limited Partner pursuant to
Sections 9.4 and 9.5. The closing of the purchase and sale of the
Purchased Units shall, in the absence of a contrary agreement between
the General Partner and the relevant Limited Partner, occur at the
Partnership's principal place of business at 11:00 a.m. (Toronto time)
on the date specified in the relevant notice or such later date as is
agreed by the General Partner and such Limited Partner in the event
that Fair Market Value is not determined prior to such specified date.
Such date and time are referred to as the "DATE OF CLOSING" and the
"TIME OF CLOSING", respectively
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(b) At the Time of Closing on the Date of Closing:
(i) the General Partner shall pay to the relevant Limited Partner the
aggregate purchase price (the "PURCHASE PRICE") payable for the
Purchased Units by delivery of, at the option of the General
Partner, either (A) a bank draft or certified cheque drawn on a
Canadian chartered bank in respect of the Purchase Price, (B)
provided the common shares of the General Partner are listed on
the Toronto Stock Exchange, such number of common shares of the
General Partner as is equal to the Purchase Price divided by the
volume weighted average trading price of such shares on the
Toronto Stock Exchange during the 10-trading day period ending on
the second trading day preceding the Date of Closing registered in
the name of such Limited Partner (or such other name as may be
directed by such Limited Partner), or (C) a combination thereof;
(ii) if any common shares of the General Partner are delivered by the
General Partner pursuant to Section 9.8(b)(i), the General Partner
shall provide a favourable opinion of its legal counsel, in a form
satisfactory to the relevant Limited Partner and its counsel,
acting reasonably, with respect to the issuance of such common
shares; and
(iii) the relevant Limited Partner shall deliver to the General Partner:
(A) a receipt for payment of the Purchase Price; (B) a written
warranty from such Limited Partner that: (I) such Limited Partner
is the sole beneficial owner of the Purchased Units, free and
clear of all liens, charges, pledges, security interests, adverse
claims or other encumbrances; and (II) there are no contractual or
other restrictions on the transfer of the Purchased Units which
have not been complied with; and (C) any deeds and documents
necessary to give effect to the transfer of the Purchased Units.
(c) If the relevant Limited Partner is not present at the Time of Closing
or is present but fails for any reason to deliver to the General
Partner the documents referred to in Section 9.8(b)(iii), the General
Partner may deposit the Purchase Price into a special account at a
branch of the Partnership's banker in the joint names of the General
Partner and such Limited Partner. Forthwith after the making of such
deposit, the General Partner shall give such Limited Partner notice
thereof, which notice shall specify the date of such deposit, the name
and address of the institution at which such deposit was made and the
account number. Such deposit shall constitute valid payment and
satisfaction of the Purchase Price even though such Limited Partner
may have voluntarily encumbered or disposed of any of the Purchased
Units and notwithstanding the fact that the certificates or
instruments representing the Purchased Units may have been delivered
to any pledgee, transferee or other Person and the Register shall be
updated by the General Partner to reflect the transfer of the
Purchased Units from such Limited Partner to the General Partner. Upon
presentation by such Limited Partner to the General Partner of the
documents required to be delivered by it pursuant to Section
9.8(b)(iii), such Limited Partner shall be entitled to be paid the
moneys and/or shares so deposited with the Partnership's banker,
without interest.
ARTICLE 10
MISCELLANEOUS
10.1 FAIR MARKET VALUE
For the purposes of this Agreement, the "FAIR MARKET VALUE" of the
Partnership, any Units or any other property shall be the fair market value of
the Partnership, such Units or such other property as determined by the General
Partner and the Limited Partners, each acting reasonably. If the General Partner
and the Limited Partners cannot agree on the determination of Fair Market Value
within 10 days of the date on which the General Partner and the Limited Partners
commence discussions as to the determination of Fair Market Value, the
determination of Fair Market Value shall be submitted to the Chief Executive
Officer of the General Partner and the Chief Financial Officer of each Limited
Partner who shall, in good faith, attempt to agree on the determination of Fair
Market Value within 10 days of such submission. If the Chief Executive Officer
of the General Partner and the Chief Financial Officer of each Limited Partner
do not agree on the determination of Fair Market Value within such 10-day
period, the General Partner and the Limited Partners shall appoint a mutually
acceptable accounting firm or investment banking firm that is independent of
each of the General Partner and the Limited Partners (an "INDEPENDENT VALUATOR")
to determine Fair Market Value as promptly as practicable and in any event
within 20 days after such appointment. The Independent Valuator shall be
instructed to provide the General Partner and the Limited Partners with full and
open access to the working papers and determinations made and prepared by the
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Independent Valuator. The fees of such Independent Valuator shall be borne
equally by the General Partner and the Limited Partners.
10.2 CONFIDENTIALITY
Each of the Partners covenants and agrees to keep all information
pertaining to or concerning the Partnership, the Business and the other Partner,
including without limitation any and all patient records, reports or information
produced as a result of the Business (the "PATIENT RECORDS") in the strictest
confidence, both while such Person is a Partner and after such Person ceases to
be a Partner, and not to disclose at any time hereafter, any such information to
any third party, provided that no Partner shall be obliged to keep in confidence
or shall incur any liability for disclosure of information which:
(a) was already in the public domain or comes into the public domain
without any breach of this Agreement;
(b) is required to be disclosed pursuant to applicable laws;
(c) is required to be disclosed in any arbitration or legal proceeding; or
(d) was disclosed to such Partner by a third party who was not, to the
knowledge of such Partner, bound by a confidentiality covenant or
obligation.
Notwithstanding the foregoing, if a Partner receives access to Patient
Records in connection with this Agreement, it shall be responsible for the
maintenance of patient confidentiality. Each Partner shall adopt procedures to
prevent the disclosure of business records, including without limitation Patient
Records, to unrelated third parties and shall comply in all material respects
with applicable laws relating to the records of the Business.
10.3 NOTICES
Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be sufficiently given if delivered in
person, transmitted by telecopy or sent by registered mail, postage prepaid, as
follows:
(a) if to the General Partner:
2385 Meadowpine Blvd.
Mississauga, ON L5N 8H9
Attention: Chief Executive Officer
Fax No.: 905.286.6300
(b) if to any Limited Partner, to the address and fax number for such
Limited Partner as specified in the Register.
Any such notice or other communication shall be deemed to have been given
and received on the day on which it was delivered or transmitted (or, if such
day is not a Business Day, on the next following Business Day) or, if mailed, on
the third Business Day after the date of mailing; provided, however, if at the
time of mailing or within three Business Days thereafter there is or occurs a
labour dispute or other event which might reasonably be expected to disrupt the
delivery of documents by mail, any such notice or other communication shall be
delivered or transmitted by telecopy. A Partner may change its address or fax
number for such purposes by giving written notice to the other Partners.
10.4 FURTHER ASSURANCES
Each Partner shall promptly execute and deliver all such further documents
and do all such other acts and things as the other Partners may request from
time to time to give effect fully to the provisions and intent of this
Agreement.
10.5 LIMITED PARTNER NOT A GENERAL PARTNER
If any provision of this Agreement has the effect of imposing upon a
Limited Partner any of the liabilities or obligations of a general partner under
the Act, such provision shall be of no force and effect.
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10.6 GOVERNING LAW
This Agreement shall be governed by and interpreted exclusively in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
10.7 SEVERABILITY
In the event that one or more of the provisions contained in this Agreement
shall be invalid, illegal or unenforceable in any respect under any applicable
law, the validity, legality or enforceability of the remaining provisions hereof
shall not be affected or impaired thereby. Each of the provisions of this
Agreement is hereby declared to be separate, severable and distinct.
10.8 COUNTERPARTS
This Agreement may be executed by multiple counterparts, each of which
shall be deemed to be an original and all of which shall be construed together
as one agreement.
IN WITNESS WHEREOF the parties have executed this Agreement.
HEMOSOL CORP.
by
---------------------------------------
Name:
Title:
HEMOSOL INC.
by
---------------------------------------
Name:
Title:
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EXHIBIT 6
LABS ASSETS
The Labs Assets include all assets located in the Labs Leased Locations
other than those denoted with a "*", including, for greater certainty:
- inventory
- fixed assets
- machinery
- vehicles
- fixtures
- tools
- furniture
- office equipment
- prepaid expenses
- books, records, accounts, lists of customers and suppliers, and reports
- transferable licences issued to MDS and related to the Labs Business,
including any permit, approval, or privilege created by a government
authority,
but, excluding, for greater certainty, intellectual property of MDS and accounts
receivables as at the Effective Time.
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EXHIBIT 7
LABS LP AGREEMENT
MDS LABORATORY SERVICES, L.P.
LIMITED PARTNERSHIP AGREEMENT
-- , 2004
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THIS LIMITED PARTNERSHIP AGREEMENT is made -- , 2004 between MDS
LABORATORY SERVICES INC., a corporation existing under the laws of Canada with
its head office at 100 International Boulevard, Toronto, Ontario, M9W 6J6, as
general partner, MDS INC., a corporation existing under the laws of Canada with
its head office at 100 International Boulevard, Toronto, Ontario, M9W 6J6, as
initial limited partner, and each person who is admitted to the Partnership as a
limited partner in accordance with the terms hereof.
WHEREAS the Partners (as herein defined) wish to form a limited partnership
for the purpose of operating a clinical laboratory business in Ontario for the
benefit of the Partners;
WHEREAS this Agreement is being entered into to set forth the terms and
conditions applicable to the relationship among the Partners and to the conduct
of the business of the Partnership;
NOW THEREFORE, in consideration of the covenants and agreements contained
in this Agreement, the parties agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires, the following
terms shall have the following meanings:
"AFFILIATE" has the meaning ascribed thereto in the Business Corporations
Act (Ontario);
"AGREEMENT" means this limited partnership agreement, as it may from time to
time be supplemented, amended or restated;
"AUDITOR" means Ernst & Young LLP or such other member in good standing of
the Canadian Institute of Chartered Accountants which is appointed by the
General Partner as the auditor of the Partnership;
"BUSINESS" has the meaning specified in Section 2.3 of this Agreement;
"DECLARATION" means the declaration filed under the Limited Partnerships Act
in respect of the Partnership and all declarations of change or amendments
thereto and renewals thereof;
"EFFECTIVE DATE" means the date on which the arrangement of Hemosol Inc.
involving its shareholders and MDS becomes effective as established by the
date of issue shown on the certificate of arrangement issued pursuant to
section 183 of the Business Corporations Act (Ontario);
"FISCAL YEAR" has the meaning ascribed to it in Section 2.6 of this
Agreement;
"GENERAL PARTNER" means the general partner of the Partnership, the first
general partner being MDS LABORATORY SERVICES INC., and any Person who is
admitted to the Partnership as a successor to MDS Laboratory Services Inc.;
"INITIAL LIMITED PARTNER" means MDS;
"INITIAL TERM" has the meaning ascribed thereto in Section 8.1 of this
Agreement;
"LICENSING ACT" means the Laboratory and Specimen Collection Centre
Licensing Act (Ontario);
"LIMITED PARTNER" means the Initial Limited Partner and each Person who is
accepted as and becomes a limited partner of the Partnership in accordance
with the terms and conditions of this Agreement;
"LIMITED PARTNERSHIPS ACT" means the Limited Partnerships Act (Ontario);
"LOSSES" has the meaning ascribed thereto in Section 4.4 of this Agreement;
"MANAGEMENT AGREEMENT" has the meaning ascribed to it in Section 3.5 of this
Agreement;
"MDS" means MDS INC.;
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"NET INCOME" means the income of the Partnership in any given Fiscal Year
less any expenses of the Partnership determined in accordance with Canadian
generally accepted accounting principles;
"NET LOSSES" means the net losses of the Partnership in any given Fiscal
Year determined in accordance with Canadian generally accepted accounting
principles;
"ORDINARY RESOLUTION" means (i) any resolution passed at a meeting of the
Limited Partners by the affirmative vote of a majority of the votes cast
thereon, or (ii) any written resolution signed by Limited Partners holding
more than 50% of the Units;
"PARTNERS" means the Limited Partners and the General Partner and "PARTNER"
means any one of them;
"PARTNERSHIP" means the limited partnership formed upon the filing of the
Declaration and initially known as MDS Laboratory Services, L.P.;
"PARTNERSHIP ASSETS" means all property and assets of any nature and kind
and wheresoever situate owned by the Partnership or in or to which the
Partnership has an interest or right;
"PATIENT RECORDS" has the meaning ascribed thereto in Section 3.14 of this
Agreement;
"PERSON" means any individual, sole proprietorship, partnership, joint
venture, unincorporated association, unincorporated syndicate,
unincorporated organization, trust, body corporate and a natural person in
his capacity as a trustee, executor, administrator or other legal
representative;
"PERSONNEL" has the meaning ascribed thereto in Section 3.2 of this
Agreement;
"RECORD" has the meaning ascribed thereto in Section 5.6 of this Agreement;
"SPECIAL RESOLUTION" means (i) any resolution passed at a meeting of the
Limited Partners by the affirmative vote of not less than two-thirds of the
votes cast thereon, or (ii) any written resolution signed by Limited
Partners holding more than 66 2/3 of the Units;
"TAX ACT" means the Income Tax Act, (Canada);
"TERM" has the meaning ascribed thereto in Section 8.1 of this Agreement;
and
"UNIT" has the meaning ascribed thereto in Section 5.1 of this Agreement.
1.2 INTERPRETATION
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the headings preceding the text, articles and paragraphs hereof are
for convenience only and do not form a part of this Agreement and are
not intended to interpret, define or limit the scope, extent or intent
of this Agreement or any provisions hereof;
(b) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with Canadian generally accepted
accounting principles;
(c) all references to currency herein are deemed to mean currency of
Canada;
(d) any reference to a statute shall include and shall be deemed to be a
reference to such statute and to the regulations made pursuant
thereto, with all amendments made thereto and in force from time to
time, and to any statute or regulation that may be passed which has
the effect of supplementing or superseding the statute so referred to
or the regulations made pursuant thereto;
(e) any reference to an entity (including, without limitation, a
partnership) shall include and shall be deemed to be a reference to
any entity that is a successor of such entity;
(f) words importing the masculine gender include the feminine or neuter
gender and words in the singular include the plural and vice versa.
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ARTICLE 2
THE PARTNERSHIP
2.1 FORMATION OF PARTNERSHIP
The parties hereto agree to form a Partnership pursuant to the terms of
this Agreement and the Limited Partnerships Act.
2.2 NAME OF PARTNERSHIP
The name of the Partnership shall be MDS Laboratory Services, L.P or such
other name as the General Partner may from time to time select. The General
Partner shall notify the Limited Partners of any change in name of the
Partnership.
If the General Partner resigns or is removed and is not replaced by MDS or
an Affiliate of MDS, the Partnership shall forthwith cease to use the name "MDS
Laboratory Services, L.P" or any other name which includes "MDS". The
Partnership shall amend this Agreement and execute and deliver all instruments
and documents necessary to evidence the change of name in each public registry
where the name of the Partnership shall have been reported and to disclaim any
rights, title or interest in or to the name "MDS Laboratory Services, L.P" or
any other name which includes "MDS".
2.3 BUSINESS OF PARTNERSHIP
The Partnership shall operate a clinical laboratory business in Ontario and
may exercise all powers ancillary and incidental thereto (the "BUSINESS"). The
Partnership shall not carry on any business other than the Business and shall
not carry on business outside of the Province of Ontario.
2.4 PRINCIPAL OFFICE
The principal office of the Partnership shall be located at 100
International Boulevard, Toronto, Ontario M9W 6J6, or such other address as the
General Partner may designate from time to time by written notice to the Limited
Partners after filing an amendment to the Declaration with respect to such
change.
2.5 FILING OF DECLARATIONS
(a) As soon as practicable following the execution of this Agreement, the
General Partner shall cause to be executed and filed such
declarations, instruments and documents as may be required under the
laws of Ontario.
(b) The General Partner shall take all necessary actions to maintain the
status of the Partnership as a limited partnership in Ontario.
(c) Each Limited Partner shall promptly execute all certificates and other
documents consistent with the terms of this Agreement necessary to
comply with the requirements for the formation and operation of the
limited partnership under the laws of Ontario.
(d) As soon as practicable following the Effective Date but in no event
later than the 75th day thereafter, the General Partner shall cause to
be executed and filed with the U.S. Internal Revenue Service, on
behalf of the Partnership, an Entity Classification Election on Form
8832 to be treated solely for U.S. income tax purposes, as an
association taxable as a corporation. Such election shall state that
it is effective on the Effective Date. The General Partner shall take
all steps necessary to file such election in a timely and complete
manner. Each person that is a Partner on the date such election is to
become effective shall, promptly upon the request of the General
Partner, execute such Form 8832.
2.6 FISCAL YEAR
The fiscal year of the Partnership (the "FISCAL YEAR") shall end on October
31st of each year. The first fiscal year shall end on October 31, 2004.
Thereafter, each Fiscal Year shall begin on November 1 of each year and end on
October 31st of the following year.
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ARTICLE 3
THE PARTNERS
3.1 GENERAL POWERS OF THE GENERAL PARTNER
The General Partner has all of the rights, powers and obligations of a
general partner under the Limited Partnerships Act and the exclusive authority
to manage and control the Business and do or cause to be done all acts
necessary, appropriate or incidental to the Business, including but not limited
to:
(a) approving all capital budgets;
(b) approving the annual budget and strategic plan for the Partnership and
any material amendments and supplements thereto;
(c) making overall policy and operational decisions with respect to the
Business and affairs of the Partnership;
(d) entering into agreements with respect to the Business;
(e) arranging for the payment of the costs and expenditures reasonably
incurred by the Partnership;
(f) selecting and determining the compensation of the management team of
the Business;
(g) opening and managing bank accounts in the name of the Partnership and
spending the capital of the Partnership in the exercise of any right
or power exercisable by the General Partner hereunder;
(h) borrowing funds in the name of the Partnership from time to time from
the General Partner or an Affiliate thereof or any recognized
financial institution selected by the General Partner;
(i) investing cash assets of the Partnership that are not immediately
required for the Business in short term investments;
(j) acting as attorney in fact or agent of the Partnership in disbursing
and collecting moneys for the Partnership, paying debts and
fulfilling the obligations of the Partnership and handling and
settling any claims of the Partnership;
(k) retaining the services of lawyers, experts and any other consultants
as the General Partner considers appropriate and as required to carry
out its obligations to the Partnership, including but not limited to
market consultants, leasing agents, advertising and public relations
agents;
(l) authorizing any Partner to act for or to assume any obligation or
responsibility on behalf of the Partnership;
(m) making any change in accounting principles used by the Partnership,
except to the extent required by Canadian generally accepted accounting
principles;
(n) commencing, defending, adjusting and abandoning any actions, suits or
legal proceedings in connection with the Partnership and, subject to
the approval of the Limited Partners, consenting to a judgment against
the Partnership;
(o) preparing and filing returns or other documents required by any
governmental or like authority, including any tax elections of the
Partnership;
(p) deciding in its sole discretion when distributions of the Partnership
shall be made and the type and amount of such distributions;
(q) obtaining any insurance coverage it considers advisable in connection
with the affairs of the Partnership; and
(r) doing all other acts and executing all other documents or instruments
as may be necessary or desirable in the opinion of the General Partner
to carry out the intent and purposes of this Agreement.
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3.2 DUTIES OF THE GENERAL PARTNER
The General Partner shall:
(a) provide, or arrange for the provision of, personnel (the "PERSONNEL")
who are properly skilled and trained, supervised and sufficient in
number to operate and manage the Business, including without
limitation:
(i) Personnel required to staff all of the Partnership's laboratory
locations in Ontario including all core labs and patient service
centres;
(ii) Personnel required to staff the Partnership's courier service; and
(iii) medical Personnel required to support the Business;
(b) arrange for oversight of all relevant activities of the Business by
appropriate medical professionals; and
(c) ensure that the Business is operated in accordance with the standards
required by government authorities and that the Partnership has all
necessary permits and licenses, including without limitation those
required by the Licensing Act.
The powers, duties and obligations of the General Partner hereunder shall
be fulfilled by the General Partner in its capacity as a partner and agent for
the Partnership.
3.3 QUALIFICATIONS AND RESPONSIBILITY FOR PERSONNEL
All Personnel shall have reasonable expertise in the Business having regard
to their employment duties. The General Partner shall ensure that the Personnel
are appropriately qualified and devote the necessary time and attention to the
affairs of the Partnership.
3.4 DELEGATION BY THE GENERAL PARTNER OR PARTNERSHIP
The General Partner may contract on behalf of itself or the Partnership
with any Person to carry out any of the duties of the General Partner and may
delegate to such Person any power and authority of the General Partner
hereunder, subject to the overall supervision of such Person by the General
Partner. No such contract or delegation shall relieve the General Partner of any
of its obligations hereunder. For greater certainty, subject to Section 3.21,
the General Partner may retain Affiliates of MDS or the General Partner on
behalf of the Partnership to provide goods or services to the Partnership.
3.5 MANAGEMENT AGREEMENT
Subject to Section 3.21, the Partnership shall enter into a management
agreement with MDS (the "MANAGEMENT AGREEMENT") on the Effective Date pursuant
to which MDS will provide to the Partnership certain support services in
accordance with the terms thereof. MDS will be entitled to receive fees for the
services it provides and reimbursement for expenses it incurs pursuant to the
Management Agreement both of which shall be payable from the assets of the
Partnership.
3.6 RELIANCE
The General Partner may rely and act upon any statement, report or opinion
prepared by, or any advice received from, the Auditor, legal counsel, experts or
other professional advisors of the General Partner or the Partnership, and,
provided the General Partner exercised reasonable care in selecting such
advisors, the General Partner shall not be responsible or held liable for any
loss or damage resulting from so relying or acting if the advice was within the
area of professional competence of the Person from whom it was received and the
General Partner acted in good faith and without negligence in relying thereon.
The General Partner shall in no way be responsible for, nor incur any
liability based on, acting or failing to act pursuant to or in reliance on
instructions of the Limited Partners so long as the General Partner acted in
good faith and without negligence in following such instructions.
3.7 AUTHORITY OF THE GENERAL PARTNER
No Person dealing with the Partnership is required to enquire into the
authority of the General Partner to take any action, execute any document or
make any decision on behalf of, and in the name of, the Partnership.
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3.8 QUALIFICATIONS OF THE GENERAL PARTNER
The General Partner represents, warrants and covenants that it:
(a) is a body corporate, duly incorporated under the laws of Canada and
that so long as it is the General Partner of the Partnership it shall
maintain its corporate existence;
(b) has the corporate capacity and authority to act as the General Partner
and to perform its obligations under this Agreement and its
obligations herein do not conflict with or constitute a default under
its constating documents or any agreements by which it is bound;
(c) is not a "non-resident" of Canada for the purposes of the Tax Act, a
"non-Canadian" for the purposes of the Investment Canada Act(Canada)
or a "financial institution" for the purposes of sections 142.2 to
142.6 of the Tax Act;
(d) has and shall continue to have all licenses and permits necessary to
carry on its business as the General Partner of the Partnership in all
jurisdictions where the activities of the General Partner or the
Partnership require such licensing or other form of registration of
the General Partner.
3.9 DUTY OF CARE
The General Partner shall exercise its powers and discharge its duties
under this Agreement honestly, in good faith and in the best interests of the
Partnership and will manage and operate the Partnership, its assets and the
Business in a manner that would be considered reasonable and prudent for
managers of like operations in Ontario. The standard of care that the Personnel
shall observe when working on behalf of the Partnership under this Agreement
shall be no less than the degree of care customarily exercised by personnel in
other clinical laboratories in Ontario generally.
3.10 QUALIFICATION OF THE LIMITED PARTNERS
Each Limited Partner severally represents, warrants, covenants and agrees
with each other Partner that such Limited Partner:
(a) is a corporation and is valid and subsisting with all necessary
capacity and authority to execute and deliver this Agreement and to
observe and perform its covenants and obligations hereunder and all
necessary approvals have been given to authorize it to execute and
deliver this Agreement and to take all actions required pursuant
hereto;
(b) is not a "non-resident" of Canada for the purposes of the Tax Act or a
"non-Canadian" for the purposes of the Investment Canada Act (Canada);
(c) is not a "financial institution" for the purposes of sections 142.2 to
142.6 of the Tax Act";
(d) shall maintain the status referred to in items (b) and (c) above, at
all times while a Limited Partner;
(e) shall not knowingly transfer its Units in whole or in part to any
Person which cannot represent and warrant the facts set out in items
(a), (b) and (c) above; and
(f) has not financed, and will not finance, its acquisition of Units with
a borrowing or other indebtedness for which recourse is or is deemed
to be limited for the purposes of section 143.2 of the Tax Act and,
for the purpose of this representation, warranty and covenant, limited
recourse indebtedness includes:
(i) indebtedness in respect of which bona fide written arrangements
were not made at the time the indebtedness was incurred, for
repayment of all principal and interest within a reasonable period
not exceeding 10 years;
(ii) indebtedness on which interest is not payable, at least annually,
at a rate equal to or greater than the lesser of the rate
prescribed under the Tax Act at the time the indebtedness arose
and the prescribed rate that is applicable from time to time
during the term of the indebtedness; and
(iii) indebtedness in respect of which such interest is not paid by the
debtor within 60 days of the end of the debtor's tax year.
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3.11 LIMITATIONS ON AUTHORITY OF LIMITED PARTNERS
No Limited Partner in its capacity as a Limited Partner shall or shall be
entitled to:
(a) take part in the control or management of the Business;
(b) execute any document which binds or purports to bind the Partnership
or any other Partner as such;
(c) have or purport to have the power or authority to bind the Partnership
or any other Partner as such;
(d) have or purport to have any authority to undertake any obligation or
responsibility on behalf of the Partnership or any other Partner as
such; or
(e) bring any action for partition or sale of or otherwise in connection
with any interest in the Partnership Assets, or register, or permit to
be filed or registered or remain undischarged, against the Partnership
Assets any lien or charge in respect of the interest of such Partner
in the Partnership.
3.12 COVENANTS OF LIMITED PARTNERS
Each Limited Partner covenants and agrees that it will promptly provide
evidence to the General Partner upon request of its status under the Tax Act or
any similar statute affecting the status of the Partnership or of any other
matter which affects or may from time to time affect such status. The General
Partner may require those Limited Partners who are non-residents of Canada for
the purposes of the Tax Act to sell their Units to residents of Canada. In the
event that a Limited Partner fails to comply with such a request, the General
Partner shall have the right to sell such Limited Partner's Units or to purchase
the same on behalf of the Partnership at fair value as determined by an
independent third party selected by the General Partner, whose determination
will be final and binding and not subject to review or appeal.
3.13 POWER OF ATTORNEY
Each Limited Partner hereby nominates, constitutes and appoints the General
Partner as the Limited Partner's true and lawful attorney and agent with full
power of substitution and authority, in the Limited Partner's name, place and
stead to do the following, namely:
(a) make, execute, swear to, acknowledge, deliver and record or file, as
the case may be, any of the following:
(i) this Agreement, the Declaration, all amendments to the Declaration
and all other documents and instruments required to qualify or
continue the qualification of the Partnership as a valid and
subsisting limited partnership in or otherwise to comply with the
laws of any jurisdiction in which the Partnership may from time to
time conduct its business;
(ii) all documents, certificates and instruments necessary to reflect
any amendment to this Agreement;
(iii) all conveyances, agreements and other instruments necessary or
desirable to reflect, facilitate and implement the dissolution and
termination of the Partnership including cancellation of any
certificates or declarations;
(iv) all elections, determinations, agreements or designations in
connection with the Business permitted or required under the Tax
Act or any other taxation or other legislation or law of like
import of Canada or of any provinces or jurisdictions in respect of
a Limited Partner's interest in the Partnership or the affairs of
the Partnership;
(v) documents necessary to give effect to the sale or assignment of a
Unit or to give effect to the admission of a transferee of Units to
the Partnership; and
(vi) documents necessary to file the election referred to in Section
2.5(d) hereof;
(b) execute and file with any governmental body or instrumentality thereof
any documents necessary to be filed in connection with the
Partnership, the Business and the Partnership Assets; and
(c) execute and deliver all such documents or instruments on behalf of and
in the name of the Partnership and the Limited Partner as may be
deemed necessary by the General Partner to carry out fully the
provisions of this Agreement in accordance with its terms.
The power of attorney granted herein is irrevocable and subject to the
provisions of any relevant legislation, will survive the death, disability,
insolvency, incapacity to manage property or other legal incapacity of the
Limited
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Partner and may be exercised by the General Partner on behalf of each Limited
Partner in executing any instrument by listing all of the Limited Partners
thereon and executing such instrument with a single signature as attorney and
agent for all of them. Each Limited Partner agrees to be bound by all
representations or actions made or taken by the General Partner pursuant to this
power of attorney and hereby waives any and all defences which may be available
to contest, negate or disaffirm the action of the General Partner taken in good
faith under this power of attorney. The power of attorney granted herein shall
continue in respect of the General Partner as long as it is the general partner
of the Partnership and shall not revoke or terminate thereafter but shall
continue in respect of a successor general partner as if the successor was the
original attorney. The power of attorney granted herein shall not revoke or
terminate any general continuing power of attorney previously granted by the
Limited Partner and shall not be revoked or terminated by any general continuing
power of attorney hereinafter granted by the Limited Partner.
3.14 CONFIDENTIALITY
Each of the Partners covenants and agrees to keep all information
pertaining to or concerning the Partnership, the Business and the other
Partners, including without limitation any and all patient records, reports or
information produced as a result of the laboratory testing services of the
Partnership (the "PATIENT RECORDS") in the strictest confidence, both while such
Person is a Partner and after such Person ceases to be a Partner, and not to
disclose at any time hereafter, any such information to any third party,
provided that no Partner shall be obliged to keep in confidence or shall incur
any liability for disclosure of information which:
(a) was already in the public domain or comes into the public domain
without any breach of this Agreement;
(b) is required to be disclosed pursuant to applicable laws;
(c) is required to be disclosed in any arbitration or legal proceeding; or
(d) was disclosed to such Partner by a third party who was not bound by a
confidentiality covenant or obligation.
Notwithstanding the foregoing, if a Partner receives access to Patient
Records in connection with this Agreement, it shall be responsible for the
maintenance of patient confidentiality. Each Partner shall adopt procedures to
prevent the disclosure of business records, including without limitation Patient
Records, to unrelated third parties and shall comply in all material respects
with applicable laws relating to the records of the Business.
3.15 PROPRIETARY METHODS
The Partnership hereby agrees that all of the systems, methods, procedures,
written materials and controls employed by the General Partner in the
performance of this Agreement ("PROPRIETARY INFORMATION") are proprietary in
nature and shall remain the property of the General Partner. The Proprietary
Information shall not at any time be distributed, copied or otherwise acquired
by the Partnership, except to the extent such Proprietary Information is in the
public domain. The Partnership agrees that the remedy at law for any breach of
covenants contained in this Section may be inadequate and would be difficult to
ascertain and therefore upon an event of a breach or threatened breach of such
covenants, the General Partner, in addition to any other remedies, shall have
the right to enjoin the Partnership from any threatened or actual activity in
violation hereof. The Partnership hereby consents and agrees that a temporary or
permanent injunction may be granted in any proceeding without the necessity of
providing actual damages or posting a bond.
3.16 REMOVAL OF GENERAL PARTNER
The Limited Partners may, at any time if the General Partner is in material
default of its obligations under this Agreement and such default has continued
for more than 60 days after written notice of such default is given to the
General Partner, by Special Resolution, remove the General Partner and appoint a
new general partner meeting the requirements of Section 3.20 who, upon
acceptance, shall assume all responsibilities and obligations imposed upon or
granted to the General Partner under this Agreement. If the Limited Partners
fail to appoint a successor general partner within 30 days of the removal of the
General Partner, the Partnership will be wound up in accordance with Article 8.
As a condition precedent to the removal, the Partnership shall pay all amounts
payable by the Partnership to the General Partner accrued to the date of removal
including for greater certainty amounts equal to the expenses and costs incurred
by the General Partner in the performance of its duties under this Agreement,
whether or not allocated pursuant to Section 6.1.
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3.17 RESIGNATION OF THE GENERAL PARTNER
The General Partner may not assign its interest in the Partnership, except
to MDS or an Affiliate thereof, without the consent of the Limited Partners by
Special Resolution. After the Initial Term has expired, the General Partner may
resign as general partner upon 120 days' notice to the Limited Partners. One or
more Limited Partners shall nominate a successor that meets the requirements of
Section 3.20 whose appointment shall be approved by Ordinary Resolution and who
accepts such position in such period. If prior to the effective date of the
General Partner's resignation a successor general partner is not appointed, the
Partnership shall wind up in accordance with Article 8. The Partnership shall
pay all amounts payable by the Partnership to the General Partner accrued to the
date of resignation including for greater certainty amounts equal to the
expenses and costs incurred by the General Partner in the performance of its
duties under this Agreement, whether or not allocated pursuant to Section 6.1.
3.18 BANKRUPTCY OF GENERAL PARTNER
The General Partner will be deemed to have resigned as General Partner upon
its bankruptcy, insolvency, the passing of a resolution requiring its
dissolution or winding-up, or in the event of the appointment of a trustee or
receiver of its affairs, such resignation to be effective upon the earlier of
the appointment of a new General Partner meeting the requirements of Section
3.20 by the Limited Partners by Ordinary Resolution and 180 days following the
deemed resignation of the General Partner. The General Partner agrees to provide
notice to the Limited Partners of the occurrence of any of the foregoing events
forthwith after the event's occurrence. The Partnership shall pay all amounts
payable by the Partnership to the General Partner accrued to the date of
resignation.
3.19 TRANSFER TO A NEW GENERAL PARTNER
On the admission of a new general partner to the Partnership on the
resignation or removal of the General Partner, the resigning or removed General
Partner will, at the Partnership's expense, do all things and take all steps to
transfer the administration, management, control and operation of the business
of the Partnership, the assets of the Partnership and the books, records and
accounts of the Partnership to the new general partner and will execute and
deliver all deeds, certificates, declarations and other documents necessary or
desirable to effect such transfer in a timely fashion.
3.20 NEW GENERAL PARTNER
A new general partner shall not be a "non-resident" of Canada for the
purposes of the Tax Act, a "non-Canadian" for the purposes of the Investment
Canada Act (Canada), a "financial institution" for the purposes of sections
142.2 to 142.6 of the Tax Act and, if a partnership, shall be a "Canadian
partnership" as defined in the Tax Act. A new general partner will become a
party to this Agreement by signing a counterpart hereof and will agree to be
bound by all of the provisions hereof and to assume the obligations, duties and
liabilities of the General Partner hereunder as from the date the new general
partner becomes a party to this Agreement.
3.21 NON-ARM'S LENGTH TRANSACTIONS
The General Partner may retain or employ itself, an Affiliate of the
General Partner or any Person who does not deal at arm's length with the General
Partner on behalf of the Partnership to provide goods or services to the
Partnership or enter into any other transaction with itself, an Affiliate of the
General Partner or any other Person who does not deal at arm's length with the
General Partner on behalf of the Partnership, provided that such retention,
employment or other transaction has been entered into in good faith and on terms
no less favourable to the Partnership than those that could been obtained in a
comparable transaction by the Partnership on an arm's length basis with a third
party.
ARTICLE 4
LIABILITY AND INDEMNITIES
4.1 UNLIMITED LIABILITY OF GENERAL PARTNER
The General Partner shall have unlimited liability for the debts,
liabilities and obligations of the Partnership.
4.2 LIMITED LIABILITY OF LIMITED PARTNERS
Subject to applicable law, the liability of each Limited Partner for the
debts, liabilities, obligations and losses of the Partnership is limited to the
capital contribution of that Limited Partner plus such Limited Partner's pro
rata
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share of the undistributed net income of the Partnership. Where a Limited
Partner has received the return of all or part of its capital contribution, such
Limited Partner is nevertheless liable to the Partnership or, where the
Partnership is dissolved, to its creditors for any amount, not in excess of the
amount returned with interest, necessary to discharge the liabilities of the
Partnership to all creditors who extended credit or whose claims otherwise arose
before the return of the contribution. Subject to the provisions of the Limited
Partnerships Act, a Limited Partner shall have no further liability for any
debts, liabilities, obligations or losses of the Partnership and shall not be
liable for any calls or assessments or further contributions to the Partnership.
4.3 LIMITATION OF LIABILITY OF GENERAL PARTNER
Notwithstanding anything else contained in this Agreement, but subject to
compliance with Section 3.9, neither the General Partner nor its officers,
directors, shareholders, employees or agents are liable, responsible for or
accountable in damages or otherwise to the Partnership or a Limited Partner for
any action taken or failure to act on behalf of the Partnership believed by the
General Partner, acting reasonably, to be within the scope of the authority
conferred on the General Partner by this Agreement or by law unless the act or
omission was performed or omitted fraudulently or in bad faith or constituted
willful misfeasance or gross negligence of the General Partner.
4.4 INDEMNITY OF LIMITED PARTNERS BY GENERAL PARTNER
The General Partner shall indemnify and hold harmless each Limited Partner
from and against any and all actions, claims, costs, losses, liabilities,
damages or expenses (including reasonable legal fees) (collectively "LOSSES")
suffered or incurred by a Limited Partner if the liability of such Limited
Partner is not limited in the manner provided for in this Agreement by reason of
the acts or omissions of the General Partner performed or omitted fraudulently
or in bad faith or attributable to the willful misfeasance or gross negligence
of the General Partner, unless the liability of such Limited Partner is not so
limited as a result of or arising out of any act or omission of such Limited
Partner.
4.5 INDEMNITY OF PARTNERSHIP BY GENERAL PARTNER
The General Partner shall indemnify and hold harmless the Partnership from
and against any and all Losses suffered or incurred by the Partnership by reason
of the acts or omissions of the General Partner performed or omitted
fraudulently or in bad faith or attributable to the gross negligence or willful
misfeasance of the General Partner.
4.6 INDEMNITY OF GENERAL PARTNER BY PARTNERSHIP
The Partnership shall indemnify and hold the General Partner (including any
General Partner that has resigned or been removed in accordance with Sections
3.16, 3.17 and 3.18) harmless from and against any and all Losses suffered or
incurred by the General Partner, its officers, directors, shareholders,
employees or agents resulting from or arising out of any act or omission of the
General Partner on behalf of the Partnership or in furtherance of the Business;
provided, however, the Partnership shall only be required to indemnify or hold
the General Partner harmless from and against any act or omission of the General
Partner which were believed by the General Partner, acting reasonably, to be
within the scope of the authority conferred by this Agreement and were not
performed or omitted fraudulently or in bad faith and are not attributable to
the willful misfeasance or gross negligence of the General Partner. Such
indemnification obligation shall be made from the Partnership Assets and no
Limited Partner shall be personally liable to the General Partner in respect
thereof.
ARTICLE 5
UNITS AND PARTNERS ACCOUNTS
5.1 THE UNITS
The interest of the Limited Partners in the Partnership shall be divided
into and represented by units (the "UNITS"). There shall be no restriction on
the maximum number of Units that a Limited Partner may hold in the Partnership.
No other classes of units will be issued. Each Unit shall be identical to all
other Units in all respects and, accordingly, shall entitle the holder to the
same rights and obligations as a holder of any other Unit. No Limited Partner
will, in respect of any Unit held by such Limited Partner, have any preference,
priority or right in any circumstance over any other Limited Partner in respect
of any Unit held by the other Limited Partner. No fractional Units will be
issued.
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5.2 CONTRIBUTION BY GENERAL PARTNER
On the Effective Date, the General Partner shall make a capital
contribution of $ -- to the capital of the Partnership and shall be entitled
to allocations and distributions of Net Income or Net Losses set out in Article
6.
5.3 CONTRIBUTIONS BY THE INITIAL LIMITED PARTNER
On the Effective Date, the Initial Limited Partner shall contribute assets
to the Partnership with an aggregate value of $ -- and the Partnership shall
issue -- Units to the Initial Limited Partner as consideration therefor.
5.4 NO REQUIREMENT TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS
No Partner shall be required to make any contributions to the capital of
the Partnership in excess of such Partner's initial capital contribution as
provided in Section 5.2 or Section 5.3, as the case may be.
5.5 ADMISSION OF NEW LIMITED PARTNER
The General Partner shall be authorized, subject to the terms and
provisions of this Agreement, to admit any Person as a Limited Partner provided
that (i) the Limited Partners have approved the admission by Special Resolution;
(ii) such Person confirms the representations, warranties and covenants set out
in Section 3.10 hereof; and (iii) such Person agrees to be bound by the terms
hereof. The General Partner shall have the right to require a subscriber for
Units to provide evidence reasonably satisfactory to it (including if requested
by the General Partner, acting reasonably, an opinion of counsel) of the
subscriber's eligibility for subscription and of the truth of such subscribers
representations and warranties. Subject to compliance with the foregoing, all of
the Partners hereby consent to the admission of such Persons as a Limited
Partner without any further act of the Limited Partners. Upon acceptance of such
Person, the General Partner will forthwith cause to be amended the Record and
such other documents as may be required by the Limited Partnerships Act.
Each new Limited Partner's interest in the Partnership shall be calculated
by issuing to such new Limited Partner a number of Units equal to the fair
market value of the Limited Partner's capital contribution to the Partnership
divided by the value of a Unit on the date that the capital contribution is
made.
5.6 RECORD
The General Partner shall:
(a) maintain a principal office for the Partnership;
(b) cause to be maintained a record (the "RECORD") of the names and
addresses of the Partners and the particulars of each Partner's
capital contribution to the Partnership;
(c) maintain such other records as may be required by law or pursuant to
this Agreement;
(d) make on behalf of the Partnership all recordings or filings with any
government or like authority that are required to be made by the
Partnership; and
(e) keep a copy of the Declaration and a copy of this Agreement at its
principal office.
5.7 AMENDMENTS TO RECORD
The rights and obligations of a subscriber for or a transferee of Units as
a Limited Partner or substituted Limited Partner, as applicable under this
Agreement commence and are enforceable by and upon the Limited Partner as
between the Limited Partner and the other Partners from the date on which the
Record is amended, as required under the Limited Partnerships Act, adding such
Limited Partner as a Limited Partner of the Partnership.
No change of a name or address of a Limited Partner, no transfer of a Unit
and no admission of a substituted Limited Partner as a Limited Partner in the
Partnership shall be effective for the purposes of this Agreement until all
reasonable requirements as determined by the General Partner with respect
thereto have been met and until such change, transfer, substitution or addition
is duly reflected in an amendment to the Record as required by the Limited
Partnerships Act. The names and addresses of the Limited Partners as reflected
from time to time in the Record shall be conclusive as to such facts for all
purposes of the Partnership.
The General Partner, on behalf of the Partnership, shall from time to time
promptly effect filings, recordings, registrations and amendments to the Record
and the Declaration and to such other documents and at such places as
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in the opinion of counsel to the Partnership are necessary or advisable to
reflect changes in the membership of the Partnership, transfers of Units and
dissolution of the Partnership as herein provided and to constitute a transferee
of Units as a substituted Limited Partner.
Except as required by law, the Partnership, General Partner or any Limited
Partner will not be bound or compelled in any way to recognize (even when having
actual notice) any equitable, contingent, future or partial interest in any Unit
or in any fractional part of a Unit or any other rights in respect of any Unit
except an absolute right to the entirety of the Unit of the Limited Partner
shown on the Record as holder of such Unit.
5.8 INSPECTION OF RECORD
Any Limited Partner shall have the right to inspect and take extracts from
the Record and to obtain a copy of the Record during normal business hours.
5.9 INITIAL EXPENSES
The Partnership shall pay all costs, commissions, disbursements, fees and
expenses incurred in connection with the formation of the Partnership.
5.10 NO RIGHT OF WITHDRAWAL
No Partner shall have any right to withdraw or make a demand for withdrawal
of any amount of capital contributed to the Partnership until the termination of
the Partnership in accordance with Article 8 hereof.
5.11 TRANSFER OF UNITS
Units are transferable in accordance with the provisions hereof. Subject to
compliance with the provisions hereof and with applicable securities laws and
the payment of a reasonable administration fee by the transferee to cover
out-of-pocket costs incurred by the General Partner in connection with the
transfer, Units may be transferred by a Limited Partner or its agent duly
authorized in writing to any Person but such Person shall not be recorded on the
Record as the holder of Units nor, if such Person is not a Limited Partner, be
entitled to become a Limited Partner unless such person has delivered to the
General Partner a transfer form completed and executed in a manner acceptable to
the General Partner (which may require the transferor to arrange for guarantee
of its endorsement by a Canadian chartered bank, registered trust company,
member of the Investment Dealers Association of Canada or a member of the
Toronto Stock Exchange), acting reasonably and until all filings and recordings
required by the Limited Partnerships Act, any other applicable legislation and
this Agreement have been duly made. Where the transferee complies with the
provisions aforesaid and is entitled to become a Limited Partner pursuant to the
provisions hereof, the General Partner shall be authorized to admit the
transferee to the Partnership as a Limited Partner and the Limited Partners
hereby consent to the admission of, and will admit, the transferee to the
Partnership as a Limited Partner, without further act of the Limited Partners
(other than as may be required by law). The General Partner shall also have the
right to deny the transfer of Units to Persons that cannot provide the
representations and warranties set out in Section 3.10 hereof.
If a transferor of Units is a firm or a corporation, or purports to assign
such Units in any representative capacity, or if an assignment results from the
death, mental incapacity or bankruptcy of a Limited Partner or is otherwise
involuntary, the transferor or its legal representative shall furnish to the
General Partner such documents, certificates, assurances, court orders and other
instruments as the General Partner may reasonably require to effect the said
transfer and assignment.
5.12 RIGHTS AND OBLIGATIONS OF SUBSTITUTED LIMITED PARTNER
Upon amendment of the Record to reflect the admission of a transferee as a
Limited Partner, the transferee shall become a Limited Partner and shall have
all of the rights and powers and shall be subject to all of the restrictions and
liabilities of the transferor in respect of the acquired Units, except any
liability of which such substituted Limited Partner did not have notice of at
the time it became a Limited Partner and which could not be ascertained from
this Agreement, the Declaration or the Record. Unless the transferor continues
to hold any Units following such transfer, the transferor of the Units shall
thereupon cease to be a Limited Partner, provided, however, that the transferor
shall remain liable for all defaults or liabilities which accrued or were
payable by it while it was a Limited Partner.
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ARTICLE 6
PARTICIPATION IN PROFITS AND LOSSES
6.1 ALLOCATION OF NET INCOME AND NET LOSSES
The Net Income of the Partnership for each Fiscal Year shall be allocated
amongst the Partners as follows:
(a) first, 100% to the General Partner until it has received an aggregate
amount equal to the sum of all reasonable expenses and costs
(including those relating to personnel salaries and benefits) incurred
by the General Partner during the Fiscal Year in connection with the
performance of its duties under this Agreement and such amount being
the reimbursement for the same; and
(b) thereafter,
(i) Limited Partners whose names appear on the Record at the end of
such Fiscal Year will be allocated 99.99% of the Net Income for
such Fiscal Year, in proportion to the number of Units held by
them; and
(ii) the General Partner will be allocated 0.01% of the Net Income for
such Fiscal Year.
The Net Losses of the Partnership for each Fiscal Year shall be allocated
among the Partners in the same proportions as the allocation of Net Income set
out in subsections 6.1(b)(i) and (ii) above.
The net income (including taxable capital gains) or losses for tax purposes
of the Partnership for each Fiscal Year, the amounts of which may vary in any
Fiscal Year from the Net Income or Net Loss for that Fiscal Year, shall be
allocated among the Partners in the same proportions as set out in (a) and (b)
above.
6.2 RIGHT OF GENERAL PARTNER TO DISTRIBUTE CAPITAL OR NET INCOME OF PARTNERSHIP
The General Partner shall determine the timing of distributions of the
Partnership in its sole discretion. If, at any time, the General Partner
decides, in its sole discretion, that it is in the best interests of the
Partnership to distribute all or some of the capital and/or Net Income of the
Partnership to the Partners, the General Partner shall distribute the Net Income
or capital to the Partners in accordance with the allocations set out in Section
6.1. Only Partners that are in compliance with the terms of this Agreement will
be eligible to participate in distributions of Net Income. Notwithstanding the
foregoing, the Partnership shall not make a distribution pursuant to subsection
6.1(b) on or prior to October 31, 2004.
6.3 LOANS BY PARTNERSHIP
The Partnership shall lend $16,000,000 to the Limited Partner (the "Loan")
on the Effective Date on commercial terms. The Loan shall be used by the Limited
Partner to fund the redemption of its Class C preferred shares. The Loan shall
be payable on demand after November 1, 2004 and the Partnership may set-off an
amount payable under the Loan against distributions of the Partnership to the
Limited Partner. Except as provided in the preceding sentence, the Partnership
shall not lend any funds to the Limited Partner on or prior to October 31, 2004.
The Partnership shall not lend funds to the General Partner or the Affiliates
thereof.
ARTICLE 7
ACCOUNTING AND FINANCIAL INFORMATION
7.1 BOOKS AND RECORDS
The General Partner shall keep and maintain, or cause to be kept and
maintained, at its principal office, full, complete and accurate books of
account of the transactions of the Partnership and records of the Business. Each
Limited Partner will have access to information concerning the Partnership
unless, in the reasonable opinion of the General Partner, such information
should be kept confidential in the interests of the Partnership.
7.2 FINANCIAL STATEMENTS
The General Partner shall ensure that all financial transactions of the
Partnership are recorded and accounted for in accordance with Canadian generally
accepted accounting principles.
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7.3 APPOINTMENT OF AUDITOR
The General Partner shall, on behalf of the Partnership, retain the Auditor
to review and report to the Partners on the financial statements of the
Partnership for each Fiscal Year.
7.4 ANNUAL REPORTING
Within 90 days of the end of each Fiscal Year, the General Partner shall
forward to each Limited Partner who is shown on the Record as a Limited Partner
at such date, an annual report containing audited financial statements of the
Partnership for the Fiscal Year just ended including the certificate of the
Auditor and comparative financial statements for the immediately preceding
Fiscal Year. Such financial statements shall include a balance sheet, a
statement of income and a statement of changes in financial position.
7.5 INCOME TAX INFORMATION
Within 90 days of the end of each Fiscal Year, the General Partner shall
forward to each Limited Partner who was shown on the Record as a Limited Partner
during the Fiscal Year just ended, such information as is necessary to enable
such Limited Partner to file income tax returns with respect to such Limited
Partner's income (or loss) from the Partnership in respect of such Fiscal Year.
7.6 OTHER INFORMATION
From time to time and upon the request of the Limited Partner, the General
Partner shall forward to the Limited Partner such information regarding the
Partnership as is necessary to enable the Limited Partner in its opinion, acting
reasonably, to comply with its filing, disclosure and other obligations under
applicable laws, regulations, orders and policies.
ARTICLE 8
DISSOLUTION AND TERMINATION OF THE PARTNERSHIP
8.1 TERM
Subject to Section 8.2, the term (the "TERM") of the Partnership shall
commence on the date of filing of the Declaration and shall continue
indefinitely for a minimum period of 15 years (the "INITIAL TERM") unless this
Agreement is otherwise terminated pursuant to its terms.
8.2 EVENTS OF DISSOLUTION
The Partnership shall be dissolved and its affairs wound-up upon the
earliest of:
(a) the removal or resignation or deemed resignation of the General
Partner unless the General Partner is replaced as provided in Section
3.16 or 3.17, as applicable;
(b) the bankruptcy or insolvency of the Partnership or the passing of a
resolution requiring the dissolution or winding-up of the Partnership,
or the appointment of a trustee or receiver of the affairs of the
Partnership;
(c) by the unanimous agreement of the Partners; and
(d) after the end of the Initial Term, by Special Resolution of the
Limited Partners.
8.3 EVENTS NOT CAUSING DISSOLUTION
Notwithstanding any rule of law or equity to the contrary, the Partnership
shall not be dissolved except in accordance with this Agreement. In particular,
but without restricting the generality of the foregoing and subject to the
express provisions of this Agreement, the Partnership shall not be dissolved or
terminated by the removal, actual or deemed resignation, death, incompetence,
bankruptcy, insolvency, other disability or incapacity, dissolution,
liquidation, winding-up or receivership, or the admission, resignation,
withdrawal or termination of the General Partner or any Limited Partner.
8.4 DISTRIBUTION OF PARTNERSHIP ASSETS
Upon an event of dissolution of the Partnership, the General Partner or
such other Person as may be appointed by the Limited Partners by Special
Resolution shall pay or provide for the payment of all debts and liabilities of
the
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Partnership and liquidation expenses and promptly make a final distribution of
the remaining Partnership Assets either in cash or in kind to the Partners in
accordance with the allocations set out in Section 6.1.
8.5 TERMINATION OF PARTNERSHIP
The Partnership shall terminate when all of its assets have been disposed
of, the net proceeds therefrom (after payment of or due provision for the
payment of, all debts, liabilities and obligations of the Partnership to
creditors) have been distributed as provided in this Article and the Partnership
has filed a declaration of dissolution prescribed by the Limited Partnerships
Act.
ARTICLE 9
GENERAL
9.1 NOTICE
All notices, requests or other communications required or permitted to be
given under this Agreement shall be in writing and delivered, posted by
first-class prepaid mail or sent by telecopier addressed to the party for whom
it is intended as follows:
(a) if to the General Partner:
100 International Boulevard
Toronto, Ontario M9W 6J6
Facsimile Number: --
Attention: --
(b) if to a Limited Partner, to the address or facsimile number of such
Limited Partner as it appears on the Record.
Notices delivered shall be deemed given and received upon delivery, those
sent by first-class prepaid mail on the 4th day after posting, and those sent by
telecopier, on the day of transmission; provided that during any period of mail
disruption, notice shall be delivered or sent by telecopier. The General Partner
may, at any time and from time to time, designate a substitute address for the
purpose of this Agreement by giving written notice thereof to the other Partners
at least 10 days in advance of the effective date of such designation.
9.2 AMENDMENTS
(a) Subject to subsection 9.2(b), (c), (d) and (e), this Agreement may be
amended only in writing and only with the consent of the Limited
Partners by Special Resolution.
(b) No amendment shall be made to this Agreement which would have the
effect of altering the ability of the Limited Partners to remove the
General Partner involuntarily, reducing any Partner's share of the Net
Income, reducing the interest of the Limited Partners in the
Partnership, changing the liability of any Limited Partner, changing
the right of a Limited Partner to vote at any meeting or changing the
Partnership from a limited partnership to a general partnership
without the unanimous written consent of the Partners.
(c) This Section 9.2 shall not be amended without the unanimous written
consent of the Partners.
(d) No amendment which would have the effect of adversely affecting the
rights and obligations of the General Partner may be made without the
consent of the General Partner, which consent may not be unreasonably
withheld.
(e) The General Partner may, without prior notice to or consent from any
Limited Partner, from time to time amend any provision of this
Agreement, if such amendment is, in the opinion of counsel to the
Partnership, for the protection or benefit of Limited Partners or of
the Partnership or to cure any ambiguity or to correct or supplement
any provision contained herein or therein which may be defective or
inconsistent with any other provision contained herein or therein
provided such cure, correction or supplemental provision does not and
will not, in the opinion of counsel to the Partnership, adversely
affect the interest of any Limited Partner or of the Partnership.
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(f) The General Partner shall notify the Limited Partners in writing of
the full details of any amendments to this Agreement within 30 days of
the effective date of the amendment.
9.3 TIME
Time shall be of the essence of this Agreement.
9.4 GOVERNING LAW
This Agreement shall be governed by and interpreted in accordance with the
laws of the Province of Ontario.
9.5 SEVERABILITY
If any provision of this Agreement is wholly or partially invalid, this
Agreement shall be interpreted as if the invalid provision, or portion thereof,
had not been a part hereof so that such invalidity shall not affect the validity
of the remainder which shall be construed as if this Agreement had been executed
without the invalid portion; and it is hereby declared to be the intention of
the parties that this Agreement would have been executed without reference to
any portion which may, for any reason, hereafter be declared or held invalid.
9.6 BINDING AGREEMENT
Subject to the restrictions on assignment and transfer herein contained,
this Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators and other legal
representatives, successors and assigns.
9.7 FURTHER ASSURANCES
The parties hereto agree to execute and deliver such further documents and
do such things as may be necessary in order to give full effect to this
Agreement.
9.8 COUNTERPARTS
This Agreement may be executed in any number of counterparts with the same
effect as if the parties hereto had all signed the same document. This Agreement
may also be adopted in any subscription form or similar instrument signed by a
Limited Partner, with the same effect as if such Limited Partner had executed a
counterpart of this Agreement. All counterparts of this Agreement shall be
construed together and shall constitute one instrument.
9.9 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties with
respect to all of the matters herein and its execution has not been induced by,
nor do any parties rely upon or regard as material, any representation or
writing not incorporated herein and made a part hereof.
9.10 LIMITED PARTNER NOT A GENERAL PARTNER
If any provision of this Agreement has the effect of imposing upon any
Limited Partner (other than, if applicable, the General Partner) any of the
liabilities or obligations of a general partner under the Limited Partnerships
Act, such provision shall be of no force and effect.
9.11 SURVIVAL
The representations, warranties and covenants made pursuant to Sections 3.8
and 3.10 shall survive the execution of this Agreement and each Partner
covenants and agrees to ensure that each representation, warranty and covenant
made pursuant to Sections 3.8 and 3.10, as applicable, remain true as long as
such Partner remains a Partner. Unless otherwise provided in this Agreement,
upon termination, no party shall have any further obligations hereunder except
for (a) obligations arising prior to the date of termination which remain
unsatisfied as of the date of termination and (b) obligations or covenants which
expressly or necessarily extend beyond the term of this Agreement including the
obligations in Sections 3.14 and 3.15.
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IN WITNESS OF WHICH the parties have duly executed this Agreement.
MDS LABORATORY SERVICES INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
MDS INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
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EXHIBIT 8
LABS MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT
MDS LABORATORY SERVICES, L.P.
-- , 2004
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THIS MANAGEMENT AGREEMENT is made as of the -- day of -- , 2004.
BETWEEN:
MDS INC., a corporation continued under the laws of Canada with its head
office at 100 International Boulevard, Toronto, Ontario, M9W 6J6 ("MDS")
OF THE FIRST PART
- and -
MDS LABORATORY SERVICES INC., a corporation incorporated under the laws of
Canada (the "GENERAL PARTNER"), as general partner of and on behalf of MDS
LABORATORY SERVICES, L.P., an Ontario limited partnership with its head office
at 100 International Boulevard, Toronto, Ontario, M9W 6J6 (the "PARTNERSHIP")
OF THE SECOND PART
WHEREAS the Partnership was formed to operate a clinical laboratory testing
business in Ontario (the "BUSINESS");
AND WHEREAS MDS and the Partnership wish to enter into this Agreement to
outline the terms on which MDS shall provide certain support services to the
Partnership;
THEREFORE in consideration of the premises, the mutual covenants herein
contained and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
The following terms shall have the meanings attributed to them as follows:
"AFFILIATE" has the meaning ascribed thereto in the Business Corporations
Act (Ontario);
"AGREEMENT" means this management agreement between the Partnership and MDS,
as amended, supplemented or restated from time to time;
"COSTS OR CLAIMS" has the meaning ascribed thereto in Section 7.1 hereof;
"LIMITED PARTNERSHIP AGREEMENT" means the limited partnership agreement of
the Partnership dated -- , 2004, as it may be amended or supplemented
from time to time;
"PATIENT RECORDS" has the meaning ascribed thereto in Section 6.2 hereof;
and
"SUPPORT SERVICES" has the meaning ascribed thereto in Section 2.1 hereof.
1.2 INTERPRETATION
For all purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the headings preceding the text, articles and paragraphs hereof are
for convenience only and do not form a part of this Agreement and are
not intended to interpret, define or limit the scope, extent or intent
of this Agreement or any provisions hereof;
(b) all accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with Canadian generally accepted
accounting principles;
(c) all references to currency herein are deemed to mean currency of
Canada;
(d) any reference to a statute shall include and shall be deemed to be a
reference to such statute and to the regulations made pursuant
thereto, with all amendments made thereto and in force from time to
time, and to any statute or regulation that may be passed which has
the effect of supplementing or superseding the statute so referred to
or the regulations made pursuant thereto;
(e) any reference to an entity (including, without limitation, a
partnership) shall include and shall be deemed to be a reference to
any entity that is a successor of such entity; and
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(f) words importing the masculine gender include the feminine or neuter
gender and words in the singular include the plural and vice versa.
ARTICLE 2
SERVICES
2.1 ENGAGEMENT
The Partnership hereby engages and retains MDS, and MDS hereby accepts such
engagement and retainer, to provide the Partnership with support services that
are required to operate the Business (the "SUPPORT SERVICES") including, without
limitation, the following:
(a) information technology services;
(b) financial services;
(c) purchasing and/or procurement services;
(d) human resources services;
(e) communications services;
(f) real estate services;
(g) regulatory compliance services; and
(h) government relations services.
The Partnership acknowledges and agrees that this Agreement does not
entitle the Partnership to have Support Services provided by any particular
employee at MDS and that MDS shall determine, in its sole discretion, the
allocation of responsibility among employees at MDS.
2.2 STANDARD OF CARE
MDS shall exercise its powers and discharge its duties and responsibilities
hereunder diligently, honestly and in good faith and in connection therewith
shall exercise the degree of care, diligence and skill of a third party service
provider in comparable circumstances.
2.3 SCOPE OF OPERATIONS
The Partnership confirms and acknowledges that the Partnership's operations
shall be limited to Ontario and be confined to servicing clients who are
situated in Ontario. MDS shall not be required to provide the Partnership with
any Support Services outside of Ontario.
2.4 OFFICERS AND PERSONNEL
MDS shall ensure that personnel assigned by MDS to perform the Support
Services are appropriately qualified and devote such time and attention to the
performance of the Support Services as may be necessary to properly discharge
MDS' responsibilities under this Agreement.
2.5 CONTRACTING WITH AFFILIATES
The Partnership acknowledges that, in the performance of its duties
hereunder, MDS may contract with, retain or delegate to one or more agents,
advisors or other persons, including without limitation Affiliates of MDS, to
provide the Support Services or to assist MDS in providing the Support Services,
provided that MDS retains full responsibility to the Partnership for the proper
performance thereof.
2.6 INDEPENDENT CONTRACTOR
The parties acknowledge and agree that MDS is at all times acting as an
independent contractor in the performance of its work, duties, and obligations
arising under this Agreement, and nothing in this Agreement is intended nor
shall be construed to create between MDS and the Partnership either a joint
venture, landlord/tenant, partnership or any other similar relationship. The
Partnership shall not have or exercise any control or direction over the methods
by which MDS shall provide the Support Services under this Agreement, although
MDS shall provide the Support Services in a manner consistent with the
reasonable needs of the Partnership and the Business.
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2.7 REPORTS AND RECORDS
When reasonably required and requested by the Partnership, MDS shall
prepare and provide or arrange for the preparation and provision of written
reports in connection with the Support Services provided pursuant to this
Agreement.
2.8 RELIANCE
MDS shall be entitled to rely on any notice or other communication
reasonably believed by it in good faith to be genuine and correct and to have
been sent to it by or on behalf of the Partnership or the General Partner.
ARTICLE 3
FEES AND EXPENSES
3.1 ANNUAL FEE
The Partnership shall pay to MDS an annual management fee, payable monthly
in advance, equal to MDS' cost of providing Support Services in each fiscal year
of the Partnership (each a "Fiscal Year") which cost shall be reasonable and
documented. MDS and the Partnership shall agree on an estimate of the annual fee
payable for each Fiscal Year (other than the year ended October 31, 2004) by
November 30th of each year. The parties agree that the annual fee payable to MDS
in the Fiscal Year ending October 31, 2004 shall be $ -- , subject to
adjustment.
At the end of each Fiscal Year, an accounting of the cost of the Support
Services provided over the year will be conducted by MDS and an adjustment will
be made to the extent that the estimated annual fee does not equal the actual
cost to MDS of providing the Support Services. If the estimated fee is lower
than the actual fee, the Partnership shall pay to MDS the difference within --
days of the determination of the actual fee. If the estimated annual fee is
higher than the actual fee, MDS shall pay the difference to the Partnership
within -- days of the determination of the actual fee.
3.2 EXPENSES
The Partnership shall be responsible for the payment of all expenses
relating to its operations, including without limitation the management fee
described in Section 3.1 and expenses related to legal, audit, tax, regulatory
matters, insurance, taxes, the preparation of financial and other reports, tax
returns and communications to partners of the Partnership, and shall promptly
reimburse MDS for all reasonable out-of-pocket expenses incurred by MDS in
providing the Support Services. MDS and the Partnership agree that MDS shall be
entitled to pay certain of the Partnership's expenses as agent for the
Partnership and MDS will be entitled to reimbursement therefor.
3.3 TAXES
Unless otherwise provided in this Agreement, all amounts expressed herein
to be payable to MDS pursuant to this Agreement are exclusive of any goods and
services tax ("GST") or retail sales tax ("RST") required to be paid thereon
pursuant to the Excise Tax Act (Canada), or applicable sales tax legislation or
otherwise and it is agreed that MDS shall be paid by the Partnership, in
addition to all amounts otherwise payable to MDS hereunder, all amounts of GST
or RST collectible by MDS with respect to all amounts otherwise payable to MDS
hereunder and such GST and RST, as applicable, shall be included by MDS in each
invoice rendered by it.
If any portion of the fee payable for the Support Services is subject to
provincial sales taxes, MDS shall (i) in its invoice to the Partnership specify
the amount of the fee that relates to taxable Support Services and the amount of
the fee that relates to non-taxable Support Services and (ii) maintain a record
of the charges for the taxable Support Services for a period of no less than
five years.
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ARTICLE 4
REPRESENTATIONS AND WARRANTIES
4.1 REPRESENTATIONS, WARRANTIES AND COVENANTS OF MDS
MDS represents, warrants and covenants that it:
(a) is a corporation continued under the laws of Canada and is validly
subsisting under such laws;
(b) has the corporate capacity and authority to perform its obligations
under this Agreement and such obligations do not and will not conflict
with or breach or result in a breach of any of its constating
documents;
(c) has duly executed and delivered this Agreement and this Agreement
constitutes a legal, valid, binding and enforceable obligation of it;
and
(d) shall obtain and maintain in full force and effect during the term of
this Agreement all licenses, permits, and certificates required by law
which are required for the performance of its obligations pursuant to
this Agreement.
4.2 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PARTNERSHIP
The Partnership represents, warrants and covenants that it:
(a) has the capacity and authority to perform its obligations under this
Agreement and such obligations do not and will not conflict with or
breach or result in a breach of the Limited Partnership Agreement;
(b) has duly executed and delivered this Agreement and this Agreement
constitutes a legal, valid, binding and enforceable obligation of the
Partnership; and
(c) shall obtain and maintain in full force and effect during the term of
this Agreement all licenses, permits, and certificates required by law
which are required for the performance of its obligations pursuant to
this Agreement.
ARTICLE 5
TERM AND TERMINATION
5.1 TERM
Unless terminated as provided herein, this Agreement shall continue in full
force and effect until the earlier of (i) the dissolution of the Partnership
pursuant to the Limited Partnership Agreement; and (ii) the bankruptcy or
insolvency of MDS or the passing of a resolution requiring the dissolution or
winding-up of MDS or the appointment of a trustee or receiver over the affairs
of MDS.
5.2 TERMINATION BY MDS
Notwithstanding Section 5.1, this Agreement may be terminated by MDS: (i)
upon 120 days prior written notice to the Partnership or (ii) immediately in the
event of the removal or resignation of MDS Laboratory Services Inc. as general
partner of the Partnership.
5.3 EFFECT OF TERMINATION; SURVIVAL
Unless otherwise provided in this Agreement, upon termination, no party
shall have any further obligations hereunder, except for (i) obligations arising
prior to the date of termination which remain unsatisfied as of the date of
termination, and (ii) obligations or covenants which expressly or necessarily
extend beyond the term of this Agreement, including the obligations in Article 6
and the obligations for the payment of the annual fee and the reimbursement of
expenses through to the date of termination in the manners described in Sections
3.1 and 3.2 above.
D-92
ARTICLE 6
RECORDS; TRADE SECRETS
6.1 ACCESS TO INFORMATION
Each of the parties shall at all reasonable times during the term of this
Agreement and thereafter permit the other parties to have reasonable access to
its documents, books, and records relating to this Agreement and any and all
access shall be subject to the requirements of all applicable laws and
regulations and requirements for certification, licensing and accreditation.
6.2 OWNERSHIP OF RECORDS
All business records and information relating exclusively to the business
and activities of any party shall be the property of that party, irrespective of
the identity of the party responsible for producing or maintaining such records
and information. Any and all patient records, reports or information produced as
a result of the performance of laboratory testing services by or on behalf of
the Partnership (collectively, the "PATIENT RECORDS") shall, as between the
parties hereto, be and remain the property of the Partnership. If MDS for any
reason receives access to the Patient Records in connection with this Agreement,
it shall be solely responsible, as between the parties hereto, for maintenance
of business and patient confidentiality with respect to any information it or
its agents shall obtain hereunder.
6.3 CONFIDENTIALITY OF RECORDS
MDS shall adopt policies, procedures and practices which shall seek to
assure that the records of the Business, including without limitation the
Patient Records, shall not be disclosed to unrelated third parties and shall
comply in all material respects with all applicable federal, provincial and
local laws and regulations relating to the records of the Business. In this
connection, information from medical records of patients and information
received from physicians pursuant to the physician-patient relationship may not
be disclosed without the consent of a patient except for use reasonably in
connection with the administration of a patient's agreement or when required or
permitted by applicable law.
6.4 PROPRIETARY METHODS
The Partnership hereby agrees that all of the systems, methods, procedures,
written materials and controls employed by MDS in the performance of this
Agreement ("PROPRIETARY INFORMATION") are proprietary in nature and shall remain
the property of MDS. The Proprietary Information shall not at any time be
utilized, distributed, copied or otherwise acquired or used by the Partnership,
except to the extent such Proprietary Information is in the public domain. The
Partnership agrees that the remedy at law for any breach of covenants contained
in this Section may be inadequate and would be difficult to ascertain and
therefore upon an event of a breach or threatened breach of such covenants, MDS,
in addition to any other remedies, shall have the right to enjoin the
Partnership from any threatened or actual activity in violation hereof. The
Partnership hereby consents and agrees that a temporary or permanent injunction
may be granted in any proceeding without the necessity of providing actual
damages or posting a bond.
ARTICLE 7
INDEMNITY AND INSURANCE
7.1 PARTNERSHIP INDEMNITY
The Partnership shall indemnify and hold harmless MDS and its officers,
directors, shareholders, employees, agents and independent contractors (the "MDS
INDEMNITEES") from and against any and all third party claims, losses,
liabilities, damages, awards, judgments, assessments, costs and expenses of any
kind or nature, including reasonable attorneys fees ("COSTS OR CLAIMS"),
resulting from: (i) MDS' performance of its obligations hereunder consistent
with the standard of care set forth in Section 2.2, and (ii) acts or omissions,
in good faith, by MDS at the direction of the Partnership or the General
Partner.
Notwithstanding the foregoing, the Partnership shall have no obligation to
indemnify or hold harmless the MDS Indemnitees to the extent that Costs or
Claims arise in whole or in part from acts or omissions of the kinds for which
MDS is required to indemnify the Partnership as provided in Section 7.2.
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7.2 MDS INDEMNITY
MDS shall indemnify and hold harmless the Partnership from and against any
and all Costs and Claims resulting from acts or omissions in the performance of
this Agreement by MDS, its officers, directors, employees or authorized agents,
provided that MDS shall have no obligation to indemnify the Partnership unless
MDS' conduct (i) falls below the standard of care set forth in Section 2.2, or
(ii) is fraudulent, criminal or intentionally wrongful.
Notwithstanding the foregoing, MDS shall not be required to indemnify or
hold harmless the Partnership from Costs or Claims that arise in whole or in
part from acts or omissions, in good faith, by MDS at the direction of the
Partnership or the General Partner.
ARTICLE 8
GENERAL
8.1 NOTICE
All notices, requests or other communications required or permitted to be
given under this Agreement shall be in writing and delivered, posted by
first-class prepaid mail or sent by telecopier addressed to the party for whom
it is intended as follows:
(a) If to MDS:
100 International Boulevard
Toronto, Ontario
M9W 6J6
Facsimile Number: --
Attention: --
(b) if to the Partnership:
c/o MDS Laboratory Services Inc.
100 International Boulevard
Toronto, Ontario
M9W 6J6
Facsimile Number: --
Attention: --
Notices delivered shall be deemed given and received upon delivery, those
sent by first-class prepaid mail on the 4th day after posting, and those sent by
telecopier, on the day of transmission; provided that during any period of mail
disruption, notice shall be delivered or sent by telecopier.
8.2 TIME
Time shall be of the essence of this Agreement.
8.3 GOVERNING LAW
This Agreement shall be governed by and interpreted in accordance with the
laws of the Province of Ontario.
8.4 SEVERABILITY
If any provision of this Agreement is wholly or partially invalid, this
Agreement shall be interpreted as if the invalid provision, or portion thereof,
had not been a part hereof so that such invalidity shall not affect the validity
of the remainder which shall be construed as if this Agreement had been executed
without the invalid portion; and it is hereby declared to be the intention of
the parties that this Agreement would have been executed without reference to
any portion which may, for any reason, hereafter be declared or held invalid.
8.5 FURTHER ASSURANCES
The parties hereto agree to execute and deliver such further documents and
do such things as may be necessary in order to give full effect to this
Agreement.
D-94
8.6 COUNTERPARTS
This Agreement may be executed in any number of counterparts with the same
effect as if the parties hereto had all signed the same document. All
counterparts of this Agreement shall be construed together and shall constitute
one instrument.
8.7 ASSIGNMENT
This Agreement may be assigned by MDS to an Affiliate of MDS. Subject to
the foregoing, this Agreement may not be assigned by any party without the prior
written consent of the other party.
8.8 SUCCESSORS AND ASSIGNS
This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors and permitted assigns.
8.9 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties with
respect to all of the matters herein and its execution has not been induced by,
nor do any parties rely upon or regard as material, any representation or
writing not incorporated herein and made a part hereof.
IN WITNESS WHEREOF the parties have duly executed this Agreement.
MDS LABORATORY SERVICES, L.P.
by its general partner,
MDS Laboratory Services Inc.
Per:
---------------------------------------
Authorized Signatory
Per:
---------------------------------------
Authorized Signatory
MDS INC.
Per:
---------------------------------------
Authorized Signatory
Per:
---------------------------------------
Authorized Signatory
D-95
EXHIBIT 9
NEW HEMOSOL SHARE CONDITIONS
SHARE CONDITIONS
HEMOSOL CORP.
(THE "CORPORATION")
1. AUTHORIZED CAPITAL
The Corporation is authorized to issue an unlimited number of common shares
(the "Common Shares") and an unlimited number of special shares (the "Special
Shares").
The Common Shares and the Special Shares of the Corporation shall have
attached thereto the respective rights, privileges, restrictions and conditions
hereinafter set forth.
2. PROVISIONS ATTACHING TO THE COMMON SHARES
The Common Shares shall have attached thereto the following rights,
privileges, restrictions and conditions:
2.1 DIVIDENDS
The holders of the Common Shares shall be entitled to receive dividends if,
as and when declared by the board of directors of the Corporation out of the
assets of the Corporation properly applicable to the payment of dividends in
such amounts and payable in such manner as the board of directors may from time
to time determine. Subject to the rights of the holders of any other class of
shares of the Corporation entitled to receive dividends in priority to or
rateably with the holders of the Common Shares, the board of directors may in
their sole discretion declare dividends on the Common Shares to the exclusion of
any other class of shares of the Corporation.
2.2 PARTICIPATION ON LIQUIDATION
In the event of the dissolution, liquidation or winding-up of the
Corporation or other distribution of its assets among its shareholders for the
purposes of winding up its affairs, the holders of the Common Shares shall,
subject to the rights of the holders of any other class of shares of the
Corporation entitled to receive the assets of the Corporation upon such a
distribution in priority to or rateably with the holders of the Common Shares,
be entitled to participate rateably in any distribution of assets of the
Corporation.
2.3 VOTING RIGHTS
The holders of the Common Shares shall be entitled to receive notice of and
to attend all annual and special meetings of the shareholders of the
Corporation, other than separate meetings of the holders of another class or
series of shares, and to one vote in respect of each Common Share held at such
meetings.
3. PROVISIONS ATTACHING TO THE SPECIAL SHARES
The Special Shares shall have attached thereto the following rights,
privileges, restrictions and conditions:
3.1 DIRECTORS' AUTHORITY TO ISSUE ONE OR MORE SERIES
The board of directors of the Corporation may issue the Special Shares at
any time and from time to time in one or more series. Before the first shares of
a particular series are issued, the board of directors of the Corporation may
fix the number of shares in such series and shall determine, subject to the
limitations set out in the articles of the Corporation, the designation, rights,
privileges, restrictions and conditions attaching to the shares of such series,
including, without limitation, (i) the rate(s), amount or method(s) of
calculation of dividends and whether they are cumulative, partly cumulative or
non-cumulative, and whether such rate(s), amount or method(s) of calculation
shall be subject to change or adjustment in the future; (ii) the date, manner
and currency of payments of dividends and the date from which they accrue or
become payable; (iii) if redeemable or purchasable, the redemption or purchase
price and terms and conditions of redemption or purchase, with or without
provision for purchase or similar funds; (iv) the voting rights, if any; (v) any
conversion, exchange or reclassification rights; and (vi) any other terms not
inconsistent with these provisions. Before the issue of the first shares of a
series, the board of directors of the Corporation shall send to the Director (as
defined in the Business Corporations Act (Ontario)) articles of amendment in the
prescribed form containing a description of such series including the
designation,
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rights, privileges, restrictions and conditions determined by the board of
directors of the Corporation and the issue of such shares shall be subject to
the issue by the Director of a certificate of amendment with respect thereto.
3.2 RANKING OF SPECIAL SHARES
(a) The Special Shares of each series shall, with respect to the payment
of dividends and the distribution of assets in the event of the
dissolution, liquidation or winding-up of the Corporation or other
distribution of its assets among its shareholders for the purposes of
winding up its affairs, rank on a parity with the Special Shares of
every other series.
(b) 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 Special Shares of any series is not paid in full, the Special
Shares of such series shall participate rateably with the Special
Shares of every other series in respect of all such accumulated
cumulative dividends (whether or not declared) and all such declared
non-cumulative dividends or all such amounts payable on any such
distribution constituting a return of capital.
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EXHIBIT 10
CONSENTS, AUTHORIZATIONS ETC. OF THE CORPORATION
A. CONSENTS WHICH ARE CONDITIONS
1. TSX.
2. NASDAQ.
3. the Court.
4. Commissioner of Competition under the Competition Act (Canada), as amended.
5. Minister of National Defence ("DND") under the Amended and Restated Licence
Agreement dated March 1, 1999 between the Corporation and DND.
6. The Bank under the Commitment Letter between the Bank as lender, the
Corporation as borrower and MDS as guarantor dated October 25, 2002, as
amended, and all documents and agreements entered in connection thereto
(including security agreements), as set out in the list of Corporation
Material Agreements in the Corporation Disclosure Letter.
B. OTHER CONSENTS
1. The holders of Options.
2. Baxter Biotech Technology S.a.r.l. ("Baxter") under the Asset Purchase
Agreement dated October 18, 2000 between the Corporation and Baxter.
3. SNC Lavalin Inc. ("SNC Lavalin") under the Construction Contract between
the Corporation and SNC Lavalin dated August 8, 2000, as amended.
D-98
EXHIBIT 11
CONSENTS, AUTHORIZATIONS ETC. OF MDS
REGULATORY
1. Consent of the Ministry of Health (Ontario) to the cancellation of the
licences currently issued under the Licensing Act to MDS in respect of the
Labs Leased Locations and issuance to the Labs Limited Partnership of
replacement licenses in respect of Labs Leased Locations transferred.
2. Register change of name with the Ministry of Environment (Ontario) in
connection with the disposal of biomedical waste and hazardous material
waste by Labs Limited Partnership.
3. Obtain Ontario Lab Accreditation for Labs Limited Partnership.
4. Advance Ruling Certificate under the Competition Act (Canada).
MATERIAL AGREEMENTS
Nil.
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EXHIBIT 12
CORPORATION INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the -- day of -- ,
2004
BETWEEN:
HEMOSOL INC., a corporation governed under the laws of Ontario
(THE "CORPORATION")
OF THE FIRST PART
- and -
HEMOSOL CORP., (the "GENERAL PARTNER") as general partner of and on
behalf of Hemosol LP, a limited partnership formed under the laws
of Ontario
(the "BLOOD PRODUCTS LP")
OF THE SECOND PART
WHEREAS in connection with an arrangement agreement dated February
11, 2004 (the "ARRANGEMENT AGREEMENT") between the Corporation and MDS Inc., the
Corporation agreed to sell all of its assets to the Blood Products LP and the
Blood Products LP agreed to purchase such assets and in consideration therefor
the Blood Products LP agreed to issue partnership units to the Corporation and
agreed to assume all of the liabilities of the Corporation pursuant to a
contribution agreement dated the date hereof between the Corporation and the
Blood Products LP (the "BLOOD PRODUCTS CONTRIBUTION AGREEMENT");
AND WHEREAS as a condition of completing the transactions
contemplated by the Arrangement Agreement, the Blood Products LP has agreed to
indemnify the Corporation against certain losses it may incur or suffer in
accordance with the terms and conditions hereof;
IN CONSIDERATION of the premises and the covenants in this
Agreement, and for other good and valuable consideration the receipt and
sufficiency of which are acknowledged, the Corporation and the Blood Products LP
agree as follows:
1. INTERPRETATION
1.1 DEFINITIONS
In this Agreement,
"AGREEMENT" means this indemnity agreement as it may be amended from time to
time;
"BLOOD PRODUCTS ASSETS" means all of the assets owned or leased by the
Corporation immediately prior to the Effective Time;
"BLOOD PRODUCTS CONTRACTS" means all contracts and agreements to which the
Corporation was a party or otherwise bound immediately prior to the
Effective Time;
"BLOOD PRODUCTS LIABILITIES" means all liabilities (contingent and
otherwise) and all other obligations of the Corporation immediately prior to
the Effective Time;
"BUSINESS" means the business and operations carried on by the Corporation
and its Subsidiaries prior to the Effective Time;
"BUSINESS DAY" means any day of the week other than a Saturday, Sunday or
statutory or civic holiday observed in Toronto, Ontario;
"DIRECT CLAIM" means any demand, action, suit, proceeding or claim asserted
by the Corporation or its Representatives for indemnity pursuant to Section
2.1 which does not result from a Third Party Claim;
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the date hereof;
D-100
"INCLUDING" and "INCLUDES" shall be deemed to be followed by the statement
"without limitation" and neither of such terms shall be construed to limit
any word or statement which it follows to the specific or similar items or
matters immediately following it;
"INDEMNITY PAYMENT" means any amount of Loss required to be paid to the
Corporation pursuant to this Agreement;
"LOSS" means any and all loss, liability, damage, cost, expense, charge,
fine, penalty or assessment, including the costs and expenses of any action,
suit, proceeding, demand, assessment, judgment, settlement or compromise
relating thereto and all interest, punitive damages, fines and penalties and
reasonable legal fees and expenses incurred in connection therewith but
excluding loss of profits;
"PARTY" means the Corporation or the Blood Products LP;
"PERSON" means any individual, partnership, limited partnership, syndicate,
sole proprietorship, company or corporation, with or without share capital,
unincorporated association, trust, trustee, executor, administrator, or
other legal personal representative, regulatory body or agency, government
or governmental agency, authority or entity, however designated or
constituted;
"PRIME RATE" for any day means the rate of interest expressed as a rate per
annum that Canadian Imperial Bank of Commerce establishes at its head office
in Toronto, Ontario as the reference rate of interest that it will charge on
that day for Canadian dollar demand loans to its customers in Canada and
which it at present refers to as its prime rate;
"REPRESENTATIVE" means each director, officer, employee, agent, solicitor,
accountant, professional advisor and other representative of the
Corporation;
"SUBSIDIARY" means 749235 Ontario Limited, Hemosol (USA) Inc., Hemosol
Research Corporation and any other corporation of which outstanding voting
securities carrying at least 50% of the votes for the election of directors
are, or any general or limited partnership, joint venture or other entity at
least 50% of whose total equity interest is, directly or indirectly, owned
or controlled by, the Corporation, prior to the Effective Time;
"TAX" or "TAXES" means all federal, state, provincial, territorial, county,
municipal, local or foreign taxes, duties, imposts, levies, assessments,
tariffs and other charges imposed, assessed or collected by a governmental
authority including, but not limited to, (i) any gross income, net income,
gross receipts, business, royalty, capital, capital gains, goods and
services, value added, severance, stamp, franchise, occupation, premium,
capital stock, sales and use, real property, personal property, ad valorem,
transfer, license, profits, windfall profits, environmental, payroll,
employment, employer health, pension plan, anti-dumping, countervail,
excise, severance, stamp, occupation, or premium tax, (ii) all withholdings
on amounts paid to or by a Person, (iii) all employment insurance premiums,
Canada, Quebec and any other pension plan contributions or premiums, (iv)
any fine, penalty, interest, or addition to tax, (v) any tax imposed,
assessed, or collected or payable pursuant to any tax-sharing agreement or
any other contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee, and (vi) any liability for any
of the foregoing as a transferee, successor, guarantor, or by contract or by
operation of law; and
"THIRD PARTY CLAIM" means any demand, action, suit, proceeding, claim,
assessment or judgment, whether judicial, administrative, regulatory or
otherwise, or settlement or compromise relating thereto, asserted against
the Corporation or its Representatives by any Person who is not a Party or
an affiliate of such a Party in respect of which the Corporation or its
Representatives would be indemnified pursuant to Section 2.1.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into articles, sections and other portions
and the insertion of headings are for convenience of reference only and shall
not affect the construction or interpretation of this Agreement.
1.3 NUMBER, ETC.
Unless the subject matter or context requires the contrary, words importing
the singular number only shall include the plural and vice versa and words
importing the use of any gender shall include all genders.
D-101
2. INDEMNITY
2.1 INDEMNITY
Subject to Section 5.1 hereof, the Blood Products LP agrees to indemnify,
defend and save the Corporation and each of its Representatives harmless from
and against any Loss suffered or incurred by the Corporation or its
Representatives from time to time relating to any matters, events or
circumstances preceding the Effective Time or as a direct or indirect result of,
or arising in connection with the following:
(a) an act or omission of the Corporation or its Representatives prior to
the Effective Time, including any act or omission in connection with
any clinical, pre-clinical and other studies and tests conducted by or
on behalf of or sponsored by the Corporation or any Subsidiary or in
which the Corporation, any Subsidiary or its products or product
candidates have participated;
(b) the operation of the Business and the care and maintenance of the Blood
Products Assets after the Effective Time, including any failure by the
Blood Products LP to pay, satisfy, discharge, perform or fulfil any of
the Blood Products Liabilities after the Effective Time or to perform
its obligations under any of the Blood Products Contracts; and
(c) any Loss resulting from section -- of the Blood Products Contribution
Agreement.
2.2 AGENCY FOR REPRESENTATIVES
The Corporation agrees that it accepts each indemnity in favour of each of
its Representatives as agent and trustee of each such Representative. The Blood
Products LP agrees that the Corporation may enforce an indemnity in favour of
any Representative on behalf of that Representative.
3. PROCEDURE REGARDING INDEMNITY
3.1 NOTICE OF THIRD PARTY CLAIMS
If the Corporation receives notice of the commencement or assertion of any
Third Party Claim, the Corporation shall give the Blood Products LP reasonably
prompt notice thereof, but in any event no later than 30 days after receipt of
such notice of such Third Party Claim (provided that any failure by the
Corporation to so notify the Blood Products LP of any Third Party Claim shall
not relieve the Blood Products LP from any liability it may have to the
Corporation and any such failure will affect the Blood Products LP's liability
only to the extent that it is materially prejudiced by such failure). Such
notice to the Blood Products LP shall describe the Third Party Claim in
reasonable detail and shall indicate, if reasonably practicable, the estimated
amount of the Loss that has been or may be sustained by the Corporation.
3.2 DEFENCE OF THIRD PARTY CLAIMS
The Blood Products LP may participate in or assume the defence of any Third
Party Claim by giving notice to that effect to the Corporation not later than 15
days after receiving notice of that Third Party Claim (the "NOTICE PERIOD"). The
Blood Products LP's right to do so shall be subject to the rights of any insurer
or other party who has potential liability in respect of that Third Party Claim.
The Blood Products LP agrees to pay all of its own expenses of participating in
or assuming such defence. The Corporation shall co-operate in good faith in the
defence of each Third Party Claim, even if the defence has been assumed by the
Blood Products LP and may participate in such defence assisted by counsel of its
own choice at its own expense. The Blood Products LP shall not enter into any
compromise or settlement of any Third Party Claim which does not provide for a
full and final release of the Corporation (with no admission of liability) in
respect of such Third Party Claim. If the Corporation has not received notice
within the Notice Period that the Blood Products LP has elected to assume the
defence of such Third Party Claim, the Corporation may, at its option, elect to
settle or compromise the Third Party Claim or assume such defence, assisted by
counsel of its own choosing and the Blood Products LP shall be liable for all
reasonable costs and expenses paid or incurred in connection therewith and any
Loss suffered or incurred by the Corporation with respect to such Third Party
Claim, provided however that the Blood Products LP shall not be liable for any
such Loss where the Corporation has settled or compromised the Third Party Claim
without the prior written consent of the Blood Products LP, such consent not to
be unreasonably withheld.
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3.3 ASSISTANCE FOR THIRD PARTY CLAIMS
The Blood Products LP and the Corporation will use all reasonable efforts
to make available to the Party which is undertaking and controlling the defence
of any Third Party Claim (the "DEFENDING PARTY"),
(a) those employees whose assistance, testimony or presence is necessary
to assist the Defending Party in evaluating and in defending any Third
Party Claim; and
(b) all documents, records and other materials in the possession of such
Party reasonably required by the Defending Party for its use in
defending any Third Party Claim,
and shall otherwise cooperate with the Defending Party. The Blood Products LP
shall be responsible for all reasonable expenses associated with making such
documents, records and materials available and for all reasonable expenses of
any employees made available by the Corporation to the Blood Products LP
hereunder, which expense shall not exceed the actual cost to the Corporation
associated with such employees.
3.4 SETTLEMENT OF THIRD PARTY CLAIMS
If the Blood Products LP elects to assume the defence of any Third Party
Claim as provided in Section 3.2, the Blood Products LP shall not be liable for
any legal expenses subsequently incurred by the Corporation in connection with
the defence of such Third Party Claim. However, if the Blood Products LP fails
to take reasonable steps necessary to defend diligently such Third Party Claim
within 15 days after receiving notice from the Corporation that the Corporation
bona fide believes on reasonable grounds that the Blood Products LP has failed
to take such steps, the Corporation may, at its option, elect to assume the
defence of and to compromise or settle the Third Party Claim assisted by counsel
of its own choosing and the Blood Products LP shall be liable for all reasonable
costs and expenses paid or incurred in connection therewith and any Loss
suffered or incurred by the Corporation with respect to such Third Party Claim,
provided however that the Blood Products LP shall not be liable for any such
Loss where the Corporation has settled or compromised the Third Party Claim
without the prior written consent of the Blood Products LP, such consent not to
be unreasonably withheld.
3.5 DIRECT CLAIMS
Any Direct Claim shall be asserted by giving the Blood Products LP
reasonably prompt written notice thereof, but in any event not later than 60
days after the Corporation becomes aware of such Direct Claim. The Blood
Products LP shall then have a period of 30 days within which to respond in
writing to such Direct Claim. If the Blood Products LP does not so respond
within such 30 day period, the Blood Products LP shall be deemed to have
rejected such Direct Claim, and in such event the Corporation shall be free to
pursue such remedies as may be available to the Corporation.
4. PAYMENT
4.1 PAYMENT
All Losses shall bear interest at a rate per annum equal to the Prime Rate
plus 2% calculated and payable monthly, both before and after judgment, with
interest on overdue interest at the same rate, from the date that the
Corporation or its Representatives disbursed funds in respect of a Loss, to the
date of payment by the Blood Products LP to the Corporation or its
Representatives, as applicable.
4.2 TAX AND INSURANCE ADJUSTMENTS
In connection with the amount of any Losses paid by the Blood Products LP
to the Corporation or its Representatives, as applicable, pursuant to this
Agreement, the Parties agree that such Losses shall be (i) reduced by the amount
of any insurance proceeds received by the Corporation or its Representatives, as
applicable, net of any Tax cost or benefit in respect of the receipt thereof, in
connection with such Losses, and if such proceeds arise after payment has been
made by the Blood Products LP hereunder, appropriate refunds will be made by the
Corporation or its Representatives, as applicable and (ii) increased or
decreased to take into account any net Tax cost or benefit incurred or enjoyed
by the Corporation or its Representatives, as applicable, arising from the
incurring of such Losses and receipt of payment of the Losses (including any net
Tax cost resulting from such increase).
D-103
5. CLAIM AMOUNTS
5.1 AMOUNT OF CLAIMS
The Corporation shall not be entitled to make any claim against the Blood
Products LP hereunder unless and until the aggregate amount of all Loss incurred
by the Corporation and its Representatives exceeds $50,000 in which event the
amount of all such Loss including such $50,000 amount may be recovered by the
Corporation.
5.2 NO LIMITATION OF LIABILITY
For greater certainty, there shall be no limitation on the amount that may
be claimed by the Corporation for indemnity hereunder nor shall there be any
limitation on the amount of Losses for which the Blood Products LP shall be
required to indemnify the Corporation.
6. REPRESENTATIONS AND WARRANTIES
6.1 BLOOD PRODUCTS LP
The Blood Products LP represents and warrants to the Corporation that:
(a) the Blood Products LP has been duly formed and is validly existing
under the laws of the Province of Ontario and the General Partner has
the power and authority as general partner under the limited
partnership agreement governing the Blood Products LP to own the
properties and conduct the business of the Blood Products LP as
presently owned and conducted and to act for and on behalf of the
Blood Products LP, including the execution, delivery and performance
of this Agreement on behalf of the Blood Products LP;
(b) the General Partner has been duly incorporated under the laws of the
Province of Ontario, is validly existing and has the corporate power
and authority to own its properties and conduct its business as
presently owned and conducted;
(c) the execution and delivery of this Agreement and the compliance by the
Blood Products LP with its terms and provisions have been duly
authorized by the board of directors of the General Partner of the
Blood Products LP;
(d) no other corporate proceedings on the part of the Blood Products LP or
the General Partner thereof are necessary to authorize this Agreement
or the compliance by the Blood Products LP with its terms and
provisions;
(e) this Agreement constitutes a valid, binding and enforceable obligation
of the Blood Products LP, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting
creditors' rights generally from time to time in effect and, as to
enforceability, general equitable principles;
(f) no authorization, consent, or approval of, or filing with, any
domestic or foreign public body or authority not already made or
obtained is necessary for the consummation by the Blood Products LP of
the transactions contemplated by this Agreement or for the fulfillment
of the terms hereof; and
(g) neither the execution and delivery of this Agreement nor the
compliance by the Blood Products LP with its terms and provisions will
violate any provision of the limited partnership agreement of the
Blood Products LP or any mortgage, lien, lease, judgment, decree,
indenture, agreement, law, statute, regulation or other restriction to
which the Blood Products LP is bound.
7. GENERAL
7.1 SURVIVAL
The indemnities provided for in this Agreement shall survive the Effective
Date.
7.2 APPLICABLE LAW AND SUBMISSION TO JURISDICTION
This Agreement shall be governed by, and interpreted and enforced in
accordance with, the laws in force in the Province of Ontario (excluding any
conflict of laws rule or principle which might refer such construction to the
laws of another jurisdiction). Each Party irrevocably submits to the
non-exclusive jurisdiction of the courts of Ontario with respect to any matter
related hereto.
D-104
7.3 RIGHTS IN ADDITION
The rights of indemnity set forth in this Agreement are in addition and
supplemental to any other rights, actions, claims or causes of action which may
arise in respect of the Arrangement Agreement and the transactions and other
agreements contemplated thereby.
7.4 NOTICE
All notices and other communications hereunder shall be in writing and
shall be delivered to the Parties at the following addresses or sent by telecopy
at the following telecopier numbers or at such other addresses or telecopier
numbers as shall be specified by the Parties by like notice:
to the Blood Products LP at:
2585 Meadowpine Blvd.
Mississauga, Ontario
L5N 8H9
Attention: Chief Executive Officer
Facsimile No.: 905 286 6300
to the Corporation at:
100 International Boulevard
Toronto, Ontario
M9W 6J6
Attention: --
Facsimile No.: --
The date of receipt of any such notice shall be deemed to be the date of
delivery thereof or, in the case of notice sent by telecopy, the date of
successful transmission thereof (unless transmission is received after normal
business hours, in which case the date of receipt shall be deemed to be the next
Business Day). Addresses for notice may be changed by giving notice in
accordance with this section.
7.5 SUCCESSORS AND ASSIGNS
This Agreement shall enure to the benefit of and be binding upon the
Parties and their respective successors. This Agreement may not be assigned by
the Corporation. This Agreement may not be assigned by the Blood Products LP
without the prior written consent of the Corporation.
D-105
IN WITNESS WHEREOF the Parties hereto have duly executed this Agreement as
of the date first above written.
HEMOSOL INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
HEMOSOL CORP., as general
partner of and on behalf
of Hemosol LP
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
D-106
EXHIBIT 13
MDS INDEMNITY AGREEMENT
INDEMNITY AGREEMENT
THIS AGREEMENT is made as of the -- day of -- ,
2004
BETWEEN:
MDS INC., a corporation governed under the laws of Canada
(the "INDEMNIFIED PARTY")
OF THE FIRST PART
- and -
HEMOSOL CORP., a corporation governed under the laws of Ontario
(the "INDEMNIFYING PARTY")
OF THE SECOND PART
- and -
HEMOSOL INC., a corporation governed under the laws of Ontario (the
"CORPORATION")
OF THE THIRD PART
WHEREAS in connection with an arrangement agreement dated February
11, 2004 (the "ARRANGEMENT AGREEMENT") between the Corporation and the
Indemnified Party, (a) the Indemnified Party has agreed to sell its limited
partnership interest in MDS Laboratory Services, L.P. to the Corporation and the
Corporation has agreed to purchase such limited partnership interest and has
agreed to issue Class A common shares and Class B non-voting shares in the
capital of the Corporation as consideration therefor, and (b) the Corporation
has agreed to sell all of its assets to Hemosol LP, of which the Indemnifying
Party is the general partner, and Hemosol LP has agreed to purchase such assets
and in consideration therefor Hemosol LP has agreed to issue partnership units
to the Corporation and has agreed to assume all of the liabilities of the
Corporation pursuant to a contribution agreement dated the date hereof between
the Corporation and Hemosol LP;
AND WHEREAS as a condition of completing the transactions
contemplated by the Arrangement Agreement, the Indemnifying Party has agreed to
indemnify the Indemnified Party against certain losses it may incur or suffer in
accordance with the terms and conditions hereof;
IN CONSIDERATION of the premises and the covenants in this
Agreement, and for other good and valuable consideration the receipt and
sufficiency of which are acknowledged, the Parties agree as follows:
1. INTERPRETATION
1.1 DEFINITIONS
IN THIS AGREEMENT,
"AGREEMENT" means this indemnity agreement as it may be amended from time to
time;
"BUSINESS DAY" means any day of the week other than a Saturday, Sunday or
statutory or civic holiday observed in Toronto, Ontario;
"CCRA" means Canada Customs and Revenue Agency or its successor;
"DEFENCE COSTS" means all reasonable costs and expenses incurred by the
Corporation in connection with the defence of a Third Party Claim;
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"DIRECT CLAIM" means any demand, action, suit, proceeding or claim asserted
by the Indemnified Party for indemnity pursuant to Section 2 which does not
result from a Third Party Claim;
"EFFECTIVE TIME" means 12:01 a.m. (Toronto time) on the date hereof;
"FEDERAL INVESTMENT TAX CREDITS" means the amount determined in respect of
the Corporation under subsection 127(9) of the Federal Tax Act as at
December 31, 2003;
"FEDERAL NON-CAPITAL LOSSES" means the amounts determined under subsection
111(8) of the Federal Tax Act in respect of the Corporation for its period
ending December 31, 2003 and for its six (6) taxation years ending prior to
December 31, 2003;
"FEDERAL SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT DEDUCTIONS" means
the maximum amount deductible by the Corporation in computing its income for
the taxation year ending December 31, 2003 pursuant to subsection 37(1) of
the Federal Tax Act;
"FEDERAL TAX ACT" means the Income Tax Act (Canada), as amended;
"FINANCING COSTS" means amounts incurred on or before December 31, 2003 and
which are deductible in computing income of the Corporation pursuant to
paragraph 20(1)(e) of the Federal Tax Act in periods ending after December
31, 2003;
"HEMOSOL LP" means Hemosol LP, a limited partnership formed under the laws
of Ontario;
"INCLUDING" and "INCLUDES" shall be deemed to be followed by the statement
"without limitation" and neither of such terms shall be construed to limit
any word or statement which it follows to the specific or similar items or
matters immediately following it;
"INDEMNIFIABLE EVENT" has the meaning provided in Section 2;
"LIABILITY CAP" means $16,000,000;
"LOSS" means:
(a) in the case of Indemnifiable Events specified in Subsections 2.1(a) and
(b), Loss as calculated in accordance with Sections 6.1 and 6.2;
(b) in the case of the Indemnifiable Event specified in Subsection 2.1(c),
Taxes which the Corporation is required to pay as a result of such
Indemnifiable Event; and
(c) in the case of the Indemnifiable Event specified in Subsection 2.1(d),
Loss as calculated in accordance with Sections 6.1 and 6.2 and Taxes
which the Corporation is required to pay as a result of such
Indemnifiable Event, as applicable;
"ONTARIO FINANCING COSTS" means amounts incurred on or before December 31,
2003 and which are deductible in computing income of the Corporation for
purposes of the Ontario Tax Act, by reference to paragraph 20(1)(e) of the
Federal Tax Act, in periods ending after December 31, 2003;
"ONTARIO SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT DEDUCTIONS" means
the maximum amount deductible by the Corporation in computing its income for
the taxation year ending December 31, 2003 for purposes of the Ontario Tax
Act, by reference to subsection 37(1) of the Federal Tax Act;
"ONTARIO NON-CAPITAL LOSSES" means the amounts determined for purposes of
the Ontario Tax Act, by reference to subsection 111(8) of the Federal Tax
Act, in respect of the Corporation for its period ending December 31, 2003
and for its six (6) taxation years ending prior to December 31, 2003;
"ONTARIO TAX ACT" means the Corporations Tax Act (Ontario), as amended;
"ONTARIO TERMINAL LOSS" means the terminal loss that will be realized by the
Corporation, determined for the purposes of the Ontario Tax Act, by
reference to subsection 20(16) of the Federal Tax Act, on the disposition of
the building located at 2585 Meadowpine Blvd., Mississauga, Ontario and
certain other depreciable property in connection with the Arrangement
Agreement;
"PARTY" means the Indemnified Party, the Indemnifying Party or the
Corporation;
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"PERSON" means any individual, partnership, limited partnership, syndicate,
sole proprietorship, company or corporation, with or without share capital,
unincorporated association, trust, trustee, executor, administrator, or
other legal personal representative, regulatory body or agency, government
or governmental agency, authority or entity, however designated or
constituted;
"PRIME RATE" for any day means the rate of interest expressed as a rate per
annum that Canadian Imperial Bank of Commerce establishes at its head office
in Toronto, Ontario as the reference rate of interest that it will charge on
that day for Canadian dollar demand loans to its customers in Canada and
which it at present refers to as its prime rate;
"SUBSIDIARY" means 749235 Ontario Limited, Hemosol (USA) Inc., Hemosol
Research Corporation and any other corporation of which outstanding voting
securities carrying at least 50% of the votes for the election of directors
are, or any general or limited partnership, joint venture or other entity at
least 50% of whose total equity interest is, directly or indirectly, owned
or controlled by, the Corporation, prior to the Effective Time;
"TAX" or "TAXES" means all federal, state, provincial, territorial, county,
municipal, local or foreign taxes, duties, imposts, levies, assessments,
tariffs and other charges imposed, assessed or collected by a governmental
authority including, but not limited to, (i) any gross income, net income,
gross receipts, business, royalty, capital, capital gains, goods and
services, value added, severance, stamp, franchise, occupation, premium,
capital stock, sales and use, real property, personal property, ad valorem,
transfer, license, profits, windfall profits, environmental, payroll,
employment, employer health, pension plan, anti-dumping, countervail,
excise, severance, stamp, occupation, or premium tax, (ii) all withholdings
on amounts paid to or by a Person, (iii) all employment insurance premiums,
Canada, Quebec and any other pension plan contributions or premiums, (iv)
any fine, penalty, interest, or addition to tax, (v) any tax imposed,
assessed, or collected or payable pursuant to any tax-sharing agreement or
any other contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee, and (vi) any liability for any
of the foregoing as a transferee, successor, guarantor, or by contract or by
operation of law;
"TERMINAL LOSS" means the loss that will be realized by the Corporation,
determined under subsection 20(16) of the Federal Tax Act on the disposition
of the building located at 2585 Meadowpine Blvd., Mississauga, Ontario and
certain other depreciable property in connection with the Arrangement
Agreement; and
"THIRD PARTY CLAIM" means any demand, action, suit, proceeding, claim,
assessment or judgment, whether judicial, administrative, regulatory or
otherwise, or settlement or compromise relating thereto, asserted against
the Corporation by an applicable taxing authority in respect of which the
Indemnified Party would be indemnified pursuant to Section 2.
1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.
The division of this Agreement into articles, sections and other portions
and the insertion of headings are for convenience of reference only and shall
not affect the construction or interpretation of this Agreement.
1.3 NUMBER, ETC.
Unless the subject matter or context requires the contrary, words importing
the singular number only shall include the plural and vice versa and words
importing the use of any gender shall include all genders.
2. INDEMNITY
Subject to Section 5 hereof, the Indemnifying Party agrees to indemnify,
defend and save the Indemnified Party harmless from and against any Loss
suffered or incurred by the Indemnified Party, directly or indirectly, from time
to time relating to or arising in connection with the following (each an
"INDEMNIFIABLE EVENT"):
(a) there having been an acquisition of control of the Corporation prior
to the date hereof for purposes of the Federal Tax Act.
D-109
(b) any one or more of the amounts determined, in the manner specified in
Section 6.2, in respect of the Corporation under column A being less
than the amounts set out beside it in column B:
<Table>
<Caption>
A B
- ------------
The excess of the aggregate of the Federal Non-Capital
Losses, the Federal Scientific Research and Experimental
Development Deductions, the Financing Costs, and the amount
of the Terminal Loss over the income inclusion arising from
the disposition of eligible capital property to Hemosol LP
pursuant to the Arrangement Agreement....................... $268,133,712
The excess of the aggregate of the Ontario Non-Capital
Losses, the Ontario Scientific Research and Experimental
Development Deductions, the Ontario Financing Costs, and the
amount of the Ontario Terminal Loss over the income
inclusion arising for the purposes of the Ontario Tax Act
from the disposition of eligible capital property to Hemosol
LP pursuant to the Arrangement Agreement.................... $284,659,490
Federal Investment Tax Credits.............................. $ 32,923,254
</Table>
(c) a deemed dividend arising on the redemption of the Class C Shares (as
defined in the Arrangement Agreement) of the Corporation as a result
of the paid up capital (within the meaning of the Federal Tax Act) of
the Common Shares (as defined in the Arrangement Agreement) being less
than $200,000,000 as at the date hereof.
(d) any of the factual statements in respect of the Corporation in any of
the submissions made by the Indemnified Party to CCRA in respect of
the application for the Tax Ruling (as defined in the Arrangement
Agreement), the Tax Ruling or the Supplemental Submissions (as defined
in the Arrangement Agreement) or any factual statements in respect of
the Corporation or its Subsidiaries in the Tax Ruling not being true
and correct in all material respects or there being any omission to
state a material fact that is required to make a statement therein in
respect of the Corporation or its Subsidiaries not misleading.
3. PROCEDURE REGARDING INDEMNITY
3.1 NOTICE OF THIRD PARTY CLAIMS
If the Corporation receives notice of the commencement or assertion of any
Third Party Claim, the Corporation shall give reasonably prompt notice thereof
(a "THIRD PARTY CLAIM NOTICE") to each of the Indemnifying Party and the
Indemnified Party, but in any event no later than 15 days after receipt of such
notice of such Third Party Claim (provided that any failure by the Corporation
to so notify the Indemnifying Party of any Third Party Claim shall not relieve
the Indemnifying Party from any liability it may have to the Indemnified Party).
Such notice shall describe the Third Party Claim in reasonable detail and shall
indicate, if reasonably practicable, the estimated amount of the Loss that has
been or may be sustained by the Indemnifying Party.
3.2 DEFENCE AND SETTLEMENT OF THIRD PARTY CLAIMS
Upon receipt of a Third Party Claim Notice, the Indemnifying Party shall
have 15 days to elect to either (a) pay to the Indemnified Party the full amount
of the Loss determined as if the Third Party Claim were successful in its
entirety, in which case the Indemnifying Party shall pay such amount to the
Indemnified Party promptly after making such election, or (b) fund the
Corporation for one-sixth of the Defence Costs, to a maximum amount equal to the
Loss in respect of the Third Party Claim (the "INDEMNIFYING PARTY PORTION"). On
or before the expiry of such 15-day period, the Indemnifying Party shall notify
each of the other Parties in writing of its election, failing which the
Indemnifying Party shall be deemed to have elected option (b).
If the Indemnifying Party elects, or is deemed to have elected, option (b),
the Indemnified Party shall have 15 days from the date of such election or
deemed election to elect to either (c) determine that it is not in favour of
having the Third Party Claim defended in which case it shall be entitled to
payment from the Indemnifying Party of the full amount of the Loss determined as
if the Third Party Claim were successful in its entirety or (d) fund the
Corporation for the Defence Costs less the Indemnifying Party Portion. On or
before the expiry of such 15-day
D-110
period, the Indemnified Party shall notify each of the other Parties in writing
of its election, failing which the Indemnified Party shall be deemed to have
elected option (d).
If the Indemnifying Party elects, or is deemed to have elected, option (b)
and the Indemnified Party elects, or is deemed to have elected, option (d),
then: (i) unless otherwise agreed between the Indemnifying Party and the
Indemnified Party in writing, such Parties shall continue to fund their
respective portion of the Defence Costs until such time as there has been a
final determination of the Third Party Claim by the applicable taxing authority
or a court of competent jurisdiction from which no appeal may be made or a
settlement has been reached between the Corporation and the applicable taxing
authority with respect to such Third Party Claim, which settlement has been
entered into at the sole discretion of the Corporation; and (ii) if the Third
Party Claim is not successfully defended in whole or in part and the Indemnified
Party suffers a Loss, the Loss payable hereunder by the Indemnifying Party shall
be reduced by the amount of the Indemnifying Party Portion of the Defence Costs
incurred by the Indemnifying Party in respect of that Third Party Claim.
If the Indemnifying Party elects option (a), then (i) the Indemnified Party
and the Corporation may, but shall not be obligated to, make such arrangements
as they may agree with respect to the defence of such Third Party Claim and the
funding of the reasonable costs and expenses incurred by the Corporation in
connection with such defence and (ii) should the Third Party Claim subsequently
be successfully defended, in whole or in part, the Indemnified Party shall have
no obligation to account to the Indemnifying Party for any benefit received as a
result of such successful defence or to refund the amount paid by the
Indemnifying Party on its electing option (a).
3.3 ASSISTANCE FOR THIRD PARTY CLAIMS
The Indemnifying Party will use all reasonable efforts to make available to
the Corporation and the Indemnified Party, at the Indemnifying Party's cost:
(a) those employees whose assistance, testimony or presence is necessary
to assist the Corporation in evaluating and in defending any Third
Party Claim; and
(a) (b) all documents, records and other materials in the possession of
such Party reasonably required by the Corporation for its use in
defending any Third Party Claim,
and shall otherwise co-operate with the Corporation and the Indemnified Party in
the defence of any Third Party Claim.
3.4 DIRECT CLAIMS
Any Direct Claim shall be asserted by the Indemnified Party giving the
Indemnifying Party reasonably prompt written notice thereof, but in any event
not later than 60 days after the later of the date that the Corporation becomes
aware of or suffers or incurs a Loss in respect of such Direct Claim. The
Indemnifying Party shall then have a period of 30 days within which to respond
in writing to such Direct Claim. If the Indemnifying Party does not so respond
within such 30 day period, the Indemnifying Party shall be deemed to have
rejected such Direct Claim, and in such event the Indemnified Party shall be
free to pursue such remedies as may be available to the Indemnified Party.
4. PAYMENT
4.1 PAYMENT
All Losses shall bear interest at a rate per annum equal to the Prime Rate
plus 2% calculated and payable monthly from the date a Third Party Claim or
Direct Claim, as the case may be, is made to the date of payment by the
Indemnifying Party to the Indemnified Party.
4.2 TAX ADJUSTMENTS
In connection with the amount of any Losses paid by the Indemnifying Party
to the Indemnified Party pursuant to this Agreement, the Parties agree that such
Losses shall be increased or decreased to take into account any net Tax cost or
benefit incurred or enjoyed by the Indemnified Party arising from the incurring
of such Losses and receipt of payment of the Losses (including any net Tax cost
resulting from such increase).
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5. LIMIT ON INDEMNITY
5.1 AMOUNT OF CLAIMS
The Indemnified Party shall not be entitled to make any claim against the
Indemnifying Party hereunder unless and until the aggregate amount of all Losses
incurred by the Indemnified Party exceeds,
(a) $3,000,000 in the case of all Losses determined under Section 6.2; or
(b) $50,000 in the case of all Losses not determined under Section 6.2;
in which event the amount of all such Losses including such $3,000,000 or
$50,000 amount, as the case may be, will be payable to the Indemnified Party.
5.2 LIMITS OF LIABILITY
The maximum aggregate liability of the Indemnifying Party to the
Indemnified Party for all Losses under this Agreement and all Defence Costs paid
by the Indemnifying Party under Section 3.2 hereof shall not in the aggregate
exceed the Liability Cap.
6. CALCULATION OF CERTAIN LOSSES
6.1 INABILITY OF CORPORATION TO USE TAX LOSSES
Subject to Section 5.2, in the case of an Indemnifiable Event described in
Subsections 2(a) or (d) of this Agreement, the result of which is that the
ability of the Corporation to utilize:
(a) all of its Federal Non-Capital Losses, Ontario Non-Capital Losses,
Federal Scientific Research and Experimental Development Deductions,
Ontario Scientific Research and Experimental Development Deductions or
Federal Investment Tax Credits is restricted, the Indemnified Party
shall be deemed to have suffered a Loss in an amount equal to the
Liability Cap; and
(b) some but not all of its Federal Non-Capital Losses, Ontario
Non-Capital Losses, Federal Scientific Research and Experimental
Development Deductions, Ontario Scientific Research and Experimental
Development Deductions, Federal Investment Tax Credits, Financing
Costs, or Ontario Financing Costs is restricted, the Indemnified Party
shall be deemed to have suffered a Loss calculated in accordance with
the provisions of Section 6.2, treating the amount(s) so restricted as
a reduction of the applicable amount specified in paragraphs (a), (b)
and/or (c) of Section 6.2.
6.2 REDUCTION OF TAX LOSS BALANCES
Subject to Section 5.2:
(a) if the amount set out in row one of column B in Subsection 2(b) of
this Agreement is greater than the amount finally determined for
column A by or by agreement with the applicable taxing authority, or
by a judgment of a court of competent jurisdiction from which no
appeal may be made, or by agreement between the parties, the Loss
shall be deemed to be an amount equal to the excess multiplied by
$0.029;
(b) if the amount set out in row two of column B in Subsection 2(b) of
this Agreement is greater than the amount finally determined for
column A by or by agreement with the applicable taxing authority, or
by a judgment of a court of competent jurisdiction from which no
appeal may be made, or by agreement between the parties, the Loss
shall be deemed to be an amount equal to the excess multiplied by
$0.018; and
(c) if the amount set out in row three of column B in Subsection 2(b) of
this Agreement is greater than the amount finally determined for
column A by or by agreement with the applicable taxing authority, or
by a judgment of a court of competent jurisdiction from which no
appeal may be made, or by agreement between the parties, the Loss
shall be deemed to be an amount equal to the excess multiplied by
$0.088.
D-112
7. REPRESENTATIONS AND WARRANTIES
7.1 INDEMNIFYING PARTY
The Indemnifying Party represents and warrants to the Indemnified Party
that:
(a) the Indemnifying Party has been duly incorporated under the laws of
the Province of Ontario, is validly existing and has the corporate
power and authority to own its properties and conduct its business as
presently owned and conducted;
(b) the execution and delivery of this Agreement and the compliance by the
Indemnifying Party with its terms and provisions have been duly
authorized by the board of directors of the General Partner of the
Indemnifying Party;
(c) no other corporate proceedings on the part of the Indemnifying Party
or the General Partner thereof are necessary to authorize this
Agreement or the compliance by the Indemnifying Party with its terms
and provisions;
(d) this Agreement constitutes a valid, binding and enforceable obligation
of the Indemnifying Party, subject to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting
creditors' rights generally from time to time in effect and, as to
enforceability, general equitable principles;
(e) no authorization, consent, or approval of, or filing with, any
domestic or foreign public body or authority not already made or
obtained is necessary for the consummation by the Indemnifying Party
of the transactions contemplated by this Agreement or for the
fulfillment of the terms hereof; and
(f) neither the execution and delivery of this Agreement nor the
compliance by the Indemnifying Party with its terms and provisions
will violate any provision of the articles and by-laws of the
Indemnifying Party or any mortgage, lien, lease, judgment, decree,
indenture, agreement, law, statute, regulation or other restriction to
which the Indemnifying Party is bound.
8. GENERAL
8.1 SURVIVAL
The indemnities provided for in this Agreement shall survive the Effective
Date, provided that the Indemnifying Party shall have no obligation to indemnify
the Indemnified Party hereunder in respect of any Direct Claim or Third Party
Claim made by the Indemnified Party after the seventh anniversary of the date
hereof.
8.2 APPLICABLE LAW AND SUBMISSION TO JURISDICTION
This Agreement shall be governed by, and interpreted and enforced in
accordance with, the laws in force in the Province of Ontario (excluding any
conflict of laws rule or principle which might refer such construction to the
laws of another jurisdiction). Each Party irrevocably submits to the
non-exclusive jurisdiction of the courts of Ontario with respect to any matter
related hereto.
8.3 RIGHTS IN ADDITION
The rights of indemnity set forth in this Agreement are in addition and
supplemental to any other rights, actions, claims or causes of action which may
arise in respect of the Arrangement Agreement and the transactions and other
agreements contemplated thereby.
8.4 NOTICE
All notices and other communications hereunder shall be in writing and
shall be delivered to the Parties at the following addresses or sent by telecopy
at the following telecopier numbers or at such other addresses or telecopier
numbers as shall be specified by the Parties by like notice:
to the Indemnifying Party at:
2585 Meadowpine Blvd.
Mississauga, Ontario
L5N 8H9
Attention: Chief Executive Officer
Facsimile No.: 905 286 6300
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to the Indemnified Party at:
100 International Boulevard
Toronto, Ontario
M9W 6J6
Attention: --
Facsimile No.: --
to the Corporation at:
100 International Boulevard
Toronto, Ontario
M9W 6J6
Attention: --
Facsimile No.: --
The date of receipt of any such notice shall be deemed to be the date of
delivery thereof or, in the case of notice sent by telecopy, the date of
successful transmission thereof (unless transmission is received after normal
business hours, in which case the date of receipt shall be deemed to be the next
Business Day). Addresses for notice may be changed by giving notice in
accordance with this section.
8.5 SUCCESSORS AND ASSIGNS
This Agreement shall enure to the benefit of and be binding upon the
Parties and their respective successors. This Agreement may not be assigned by
the Corporation or by the Indemnified Party. This Agreement may not be assigned
by the Indemnifying Party without the prior written consent of the Indemnified
Party.
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IN WITNESS WHEREOF the Parties hereto have duly executed this Agreement as
of the date first above written.
MDS INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
HEMOSOL CORP.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
HEMOSOL INC.
By:
--------------------------------------
Name:
Title:
By:
--------------------------------------
Name:
Title:
D-115
ANNEX E -- KPMG FAIRNESS OPINION
LOGO
The Independent Committee
and the Board of Directors
Hemosol Inc.
2585 Meadowpine Blvd.
Mississauga, Ontario
L5N 8H9
February 11, 2004
TO THE INDEPENDENT COMMITTEE AND THE BOARD OF DIRECTORS
KPMG Corporate Finance Inc. ("KPMG") understands that Hemosol Inc.
("Hemosol") proposes to implement a plan of arrangement (the "Arrangement")
under the Business Corporations Act (Ontario) involving Hemosol, its
securityholders and MDS Inc. ("MDS") the purpose of which is to allow Hemosol's
business to exchange, in effect, its existing accumulated tax losses, certain
undeducted capital expenditures and tax credits (the "Tax Losses") for a cash
infusion indirectly funded by MDS and certain other consideration. KPMG
understands that the Arrangement is to be carried out in accordance with the
arrangement agreement dated February 11, 2004 between Hemosol and MDS (the
"Arrangement Agreement").
KPMG has been engaged by the Independent Committee of the Board of
Directors of Hemosol (the "Independent Committee") to review the terms of the
Arrangement and to provide the Board of Directors of Hemosol (the "Hemosol
Board") with an opinion as to the fairness of the Arrangement, from a financial
point of view, to the shareholders, warrantholders and holders of broker options
of Hemosol (collectively, the "Securityholders"), other than MDS and its
affiliates (the "Fairness Opinion"). KPMG was not engaged to prepare and did not
prepare a formal valuation in connection with this Fairness Opinion.
KPMG understands that this Fairness Opinion will be sent to the
Securityholders as a part of a management information circular describing the
Arrangement (the "Circular").
ENGAGEMENT OF KPMG
KPMG was formally engaged by the Independent Committee by letter dated
November 24, 2003 (the "Engagement Agreement") to provide this Fairness Opinion.
The terms of the Engagement Agreement provide that KPMG is to be paid a fixed
fee for this Fairness Opinion. In addition, KPMG is to be reimbursed for its
reasonable out-of-pocket expenses and be indemnified by Hemosol in respect of
certain liabilities which may be incurred by KPMG in connection with the
provision of its services. No part of KPMG's fee is contingent upon the
conclusions reached in this Fairness Opinion or on the successful completion of
the Arrangement.
CREDENTIALS OF KPMG
KPMG is one of the world's largest professional services organization,
offering a broad range of services. KPMG's professionals have significant
experience in advising a broad range of companies for various purposes,
including securities law compliance, fairness opinions, mergers and
acquisitions, corporate income tax and litigation matters, amongst other things.
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INDEPENDENCE OF KPMG
KPMG is not an insider, associate or affiliate (as such terms are defined
in the Securities Act (Ontario)) of Hemosol or MDS. Neither KPMG nor any of its
affiliates is an advisor to MDS in respect of the Arrangement. KPMG has not been
engaged within the last two years to perform financial advisory, tax or other
services for, or been involved in a prior valuation, appraisal or review of, the
financial status of Hemosol or MDS, other than pursuant to this engagement.
SCOPE OF REVIEW
In connection with preparing and rendering this Fairness Opinion, KPMG has
reviewed, and where it considered appropriate, relied upon, or undertaken, among
other things, the following:
1. the Arrangement Agreement and the agreements or other documents
attached as Exhibits thereto, including the Plan of Arrangement, the
Blood Products Partnership Agreement, the Labs Partnership Agreement
and the Labs Management Agreement;
2. the financial statements of Hemosol, including the audited
consolidated balance sheets, statements of loss and deficit and cash
flow statements as at and for the fiscal years ended December 31,
2001 and 2002, the unaudited consolidated balance sheet, statement of
loss and deficit and cash flow statement as at and for the nine-month
period ended September 30, 2003;
3. other publicly available information concerning Hemosol, including
the Annual Information Form dated May 27, 2003, the 2002 Annual
Report to Shareholders, the Management Information Circular dated
December 22, 2003 and the Short-Form Prospectus dated January 13,
2004;
4. income tax returns of Hemosol and schedules prepared by management of
Hemosol summarizing the nature and estimated amount of tax attributes
of Hemosol as at December 31, 2003;
5. Hemosol's management's financial projections of EBITDA, capital
expenditures and licence payments for the years ending December 31,
2004 through 2010;
6. reported prices and trading activity for the shares of Hemosol;
7. discussions with representatives of senior management of Hemosol with
respect to the current operations and future prospects of its
business (the "Blood Products Business");
8. expressions of interest which Hemosol received regarding transactions
designed to allow Hemosol to benefit from the value of the Tax
Losses;
9. publicly available information concerning MDS, including the Annual
Information Form dated January 31, 2003 and the 2002 Annual Report to
MDS's shareholders;
10. unaudited summary financial information for MDS's Ontario clinical
laboratory services business (the "Labs Business") provided by MDS,
including a balance sheet as at October 31, 2003 and operating
results for the years ending October 31, 1999 to 2003 and projected
operating results for the year ending October 31, 2004;
11. certain public stock market and financial data for publicly traded
companies with operations comparable to the Labs Business;
12. discussions with representatives of senior management of MDS with
respect to the current operations and future prospects of the Labs
Business;
13. discussions with the legal and tax advisors to Hemosol in respect of
the financial and tax impacts of the Arrangement to Securityholders
other than MDS and its affiliates;
14. review of transactions involving tax attributes, including those
publicly announced and other nonpublic transactions in which KPMG
advised; and,
15. general industry and economic information obtained from other sources
considered reliable and necessary by KPMG in the circumstances.
KPMG's review consisted primarily of inquiry, review, analysis and
discussion of this information. KPMG has not, to the best of its knowledge, been
denied access by Hemosol or MDS to any information requested by KPMG.
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RESTRICTIONS AND QUALIFICATIONS
This Fairness Opinion has been prepared for the Independent Committee and
the Hemosol Board, and except as explicitly permitted herein, is not to be used
or relied upon by any person, other than the Independent Committee or the
Hemosol Board, for any purpose other than as stated herein, and except as
provided in the last sentence of this paragraph, is not intended for general
circulation, nor is it to be published or made available to other parties in
whole or in part without KPMG's prior written consent. KPMG expressly disclaims
any liability by reason of the use of this Fairness Opinion by any person other
than the Independent Committee or the Hemosol Board and does not assume any
responsibility for losses resulting from the unauthorized or improper use of
this Fairness Opinion. Subject to the terms of the Engagement Agreement, KPMG
consents to the inclusion of this Fairness Opinion, along with a summary of the
basis for this Fairness Opinion, in a form acceptable to KPMG in the Circular,
and to the filing thereof, as necessary, by Hemosol with the applicable
securities commissions or similar regulatory authorities in Canada and the
United States.
The financial statements and other information provided by Hemosol, MDS or
their representatives have been accepted, without further verification, as
correctly reflecting the relevant business conditions and operating results for
the respective periods.
KPMG is not commenting on, nor is it in a position to comment on, the
likely trading price or marketability of the common shares of Hemosol Corp.
("New Hemosol") or the Class A common shares of Labco (as defined below).
KPMG has not independently verified the accuracy and completeness of the
information supplied to KPMG with respect to Hemosol, MDS and their affiliates
and subsidiaries and does not assume any responsibility with respect to it. KPMG
has relied upon and assumed the completeness, accuracy and fair presentation of
all financial and other information, data, advice, opinions, representations and
other material obtained by it from public sources or provided to it by, on
behalf of or at the request of the Independent Committee, Hemosol or MDS, and
this Fairness Opinion is conditional upon such completeness, accuracy and fair
presentation. KPMG has assumed that the projections provided to it by management
of Hemosol and/or MDS represent the best estimate of the most probable results
for the Blood Products Business or the Labs Business for the periods presented
therein. In preparing the Fairness Opinion, KPMG has made certain assumptions in
addition to those noted herein which it considered to be reasonable and
appropriate in the circumstances.
This Fairness Opinion is rendered as of February 11, 2004, on the basis of
securities markets and economic and general business and financial conditions
currently prevailing and the condition and prospects, financial and otherwise,
of Hemosol and of the Labs Business as it was reflected in the information and
documents reviewed by KPMG and as it was represented to KPMG in discussions with
the management of Hemosol and MDS.
No opinion, counsel, or interpretation is intended in matters that require legal
or other appropriate professional advice. It is assumed that such opinions,
counsel or interpretations have been or will be obtained from the appropriate
professional sources.
KPMG disclaims any undertaking or obligation to advise any person of any
change in any fact or matter affecting this Fairness Opinion which may come or
be brought to KPMG's attention after the date hereof.
APPROACH
The assessment of fairness from a financial point of view must be
determined in the context of each particular transaction. KPMG has based this
Fairness Opinion on methods and techniques that KPMG considered appropriate in
the circumstances and considered a number of factors in KPMG's review of the
Arrangement. The preparation of a fairness opinion is a complex process and it
is not necessarily susceptible to partial analysis or a summary description.
Accordingly, KPMG's analyses must be considered as a whole and the selection of
portions of KPMG's analyses or the factors considered by us, without considering
all factors and analyses together, could create a misleading view of the
approaches underlying this Fairness Opinion. This Fairness Opinion is not to be
construed as a recommendation to any holder of Hemosol shares to support or
reject the Arrangement.
In summary form, KPMG understands that the Arrangement involves the
following:
- Shareholders of Hemosol will receive one common share of New Hemosol and
one Class A common share of Labco for each common share of Hemosol that
they held immediately prior to the effective time of the Arrangement.
E-3
- Each convertible security of Hemosol, other than stock options issued
under its stock option plan, will become a security to purchase common
shares of New Hemosol with terms identical to such convertible security
of Hemosol, other than a reduction of the exercise price by $0.04.
- Certain stock options of Hemosol issued under its stock option plan will
be replaced with options to purchase common shares of New Hemosol with
terms identical to such stock options of Hemosol, other than a reduction
of the exercise price by $0.04.
- Hemosol will transfer the Blood Products Business to a limited
partnership (the "Blood Products Partnership") and the Blood Products
Partnership will assume all of the obligations of Hemosol. Following the
transfer by Hemosol of the Blood Products Business to the Blood Products
Partnership, Hemosol is referred to as "Labco". On completion of the
Arrangement, approximately 93% of the Blood Products Partnership will be
owned by New Hemosol, which will control the Blood Products Partnership
as its general partner and approximately 7% of the Blood Products
Partnership will be owned by Labco as a limited partner.
- MDS will transfer the Labs Business to a limited partnership (the "Labs
Partnership"). On completion of the Arrangement, 99.99% of the Labs
Partnership will be owned by Labco as a limited partner and 0.01% of the
Labs Partnership will be owned by a wholly-owned subsidiary of MDS,
which will control the Labs Partnership as its general partner.
- New Hemosol will receive cash redemption proceeds of $16 million from
Labco (which will be funded by a loan from the Labs Partnership). $1
million of such proceeds will be held in escrow to satisfy liabilities
relating to the Blood Products Business remaining with Labco, if any, of
which Labco becomes aware within a one-year period.
- MDS will surrender an aggregate of 2,500,000 warrants to purchase common
shares of Hemosol at an exercise price of $1 that it currently holds or
has the right to receive in certain circumstances.
- The share ownership of New Hemosol, which will be in effect the
successor to the Blood Products Business, will mirror Hemosol's share
ownership immediately prior to the Arrangement. It is a condition of
closing that the common shares of New Hemosol be listed on the Toronto
Stock Exchange and quoted on The Nasdaq National Market. The Class A
common shares of Labco will not be listed or posted for trading on any
stock exchange or market.
- The share ownership of Labco, which will be in effect the successor to
the Labs Business, will be such that Hemosol shareholders (other than
MDS and its subsidiaries) will hold 0.44% of Labco's equity securities
(through their ownership of not less than 52.5% of the voting shares of
Labco) and MDS will hold the remaining 99.56% of Labco's equity
securities (through its ownership of not more than 47.5% of the voting
shares and 100% of the non-voting shares of Labco).
- Labco will utilize the Tax Losses against income that it receives from
the Labs Partnership and the Blood Products Partnership.
In order to assess the fairness of the Arrangement from a financial point
of view to the Securityholders, other than MDS and its affiliates, KPMG reviewed
and considered the estimated value of each constituent component to be
transferred and/or conveyed as part of the overall Arrangement using procedures
and approaches which it considered appropriate and acceptable in the
circumstances based on the financial and other information as available or as
provided by either Hemosol or MDS. In particular, KPMG assessed the value of the
following constituent components of the Arrangement: (i) the Class A common
shares of Labco to be distributed to Hemosol shareholders; (ii) the warrants
surrendered by MDS; (iii) the 7% limited partnership interest in the Blood
Products Business to be held by Labco, in which MDS will own 99.56% of the
equity; and (iv) the Tax Losses. Based on such values together with the $16
million cash infusion to the Blood Products Business, KPMG assessed the
effective or implied transfer value of the Tax Losses and concluded that such
implied value fell within an acceptable range of values observed in other
transactions involving the transfer or conveyance of tax attributes based on
publicly-available information or transactions in which KPMG advised. In
assessing the reasonableness of the implied value of the Tax Losses, KPMG also
considered other factors such as the nature of the consideration to be received
and KPMG's observation that in certain other comparable transactions the
relevant cash payment has been paid over time or may be subject to
contingencies, alternative transactions may involve the discontinuance or
significant restructuring of existing operations, the large quantum of the Tax
Losses and the limited number of companies and
E-4
businesses capable of taking advantage of such quantum of Tax Losses and
alternative opportunities that might be available to Hemosol based on certain
expressions of interest received and the degree of risk associated with
concluding such alternatives as compared to the Arrangement. In addition, KPMG
also considered certain additional factors that might influence the assessment
of fairness from a financial point of view, including the potential tax impact
to Hemosol shareholders resident in the United States. In this regard, KPMG
understands and has assumed that any adverse impact to Hemosol shareholders
resident in the US would be minimal.
CONCLUSION
Based upon and subject to the foregoing and such other matters KPMG
considered to be relevant, KPMG is of the opinion that as of the date hereof,
the Arrangement is fair from a financial point of view to the Securityholders,
other than MDS and its affiliates.
Yours very truly,
KPMG Corporate Finance Inc.
KPMG CORPORATE FINANCE INC.
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ANNEX F -- NEW HEMOSOL STOCK OPTION PLAN
HEMOSOL CORP.
STOCK OPTION PLAN
(AS OF --, 2004)
ARTICLE 1
PURPOSE OF PLAN
1.1 The purpose of the Plan is to assist directors, officers, members of any
scientific advisory board (a "Scientific Advisory Board") and key
employees of and Consultants to the Corporation and its Subsidiaries to
participate in the growth and development of the Corporation and its
Subsidiaries by providing such persons with the opportunity, through
share options, to acquire an increased proprietary interest in the
Corporation.
ARTICLE 2
DEFINED TERMS
2.1 Where used herein the following terms shall have the following meanings,
respectively:
(a) "Arrangement" means the arrangement of Hemosol Inc. under section 182
of the Business Corporations Act (Ontario) pursuant to the articles
of arrangement of Hemosol Inc. dated -- , 2004;
(b) "Board" means the board of directors of the Corporation or, if
established and duly authorized to act, the executive committee of
the Board;
(c) "Business Day" means any day, other than a Saturday or a Sunday, on
which The Toronto Stock Exchange is open for trading;
(d) "Compensation Committee" has the meaning attributed thereto in
Article 3 hereof;
(e) "Consultant" means any person or company engaged to provide ongoing
consulting services to the Corporation or any of its Subsidiaries who
is not also an insider (as defined in section 627 of the Toronto
Stock Exchange Company Manual) of the Corporation or any of its
Subsidiaries;
(f) "Corporation" means Hemosol Corp. and includes any division thereof,
any successor corporation thereto and any division of any such
successor;
(g) "Eligible Person" means any director, officer, member of a Scientific
Advisory Board or full-time employee of or Consultant to the
Corporation or any of its Subsidiaries, or any person designated, or
who belongs to a class of persons designated, as an "Eligible Person"
by the Board;
(h) "Market Price" at any date in respect of Shares shall be the closing
price of such Shares on The Toronto Stock Exchange (or, if such
Shares are not then listed and posted for trading on The Toronto
Stock Exchange, on such stock exchange in Canada on which such Shares
are listed and posted for trading as may be selected for such purpose
by the Compensation Committee) on the last Business Day preceding the
date on which the Option is granted or, in the event the Option is
granted after the close of trading on a Business Day, the closing
price on the applicable stock exchange on such Business Day. In the
event that such Shares did not trade on the Business Day, the Market
Price shall be the average of the bid and ask prices in respect of
such Shares at the close of trading on such date. In the event that
such Shares are not listed and posted for trading on any stock
exchange, the Market Price in respect thereof shall be the fair
market value of such Shares as determined by the Compensation
Committee in its sole discretion;
(i) "Option" means an option to purchase Shares granted under the Plan;
(j) "Option Price" means the price per Share at which Shares may be
purchased under the Option, as the same may be adjusted from time to
time in accordance with Article 8 hereof;
F-1
(k) "Optionee" means a person to whom an Option has been granted;
(l) "Outstanding Issue" means the number of Shares outstanding on a
non-diluted basis;
(m) "Plan" means the Hemosol Corp. Stock Option Plan, as embodied herein,
as the same may be amended, varied or restated from time to time;
(n) "Replaced Options" means certain of the outstanding options to
purchase common shares of Hemosol Inc. granted pursuant to the stock
option plan of Hemosol Inc. as amended and restated as of -- 2004
that were cancelled in exchange for Replacement Options pursuant to
the Arrangement;
(o) "Replacement Option" means an Option issued pursuant to the
Arrangement;
(p) "Scientific Advisory Board" means any scientific advisory board of
the Corporation or any Subsidiary;
(q) "Shares" means the common shares of the Corporation, or, in the event
of an adjustment contemplated by Article 8 hereof, such other shares
or securities to which an Optionee may be entitled upon the exercise
of an Option as a result of such adjustment; and
(r) "Subsidiary" means any corporation which is a subsidiary (as such
term is defined in the Business Corporations Act (Ontario)) of the
Corporation, including any division thereof, or any other entity
controlled by the Corporation, including, for greater certainty,
Hemosol LP.
ARTICLE 3
ADMINISTRATION OF THE PLAN
3.1 The Plan shall be administered by the compensation committee (the
"Compensation Committee") appointed by the Board and consisting of not
less than three members of the Board. The members of the Compensation
Committee shall serve at the pleasure of the Board and vacancies
occurring in the Compensation Committee shall be filled by the Board.
3.2 The Compensation Committee shall select one of its members as its
Chairman and shall hold its meetings at such time and place as it shall
deem advisable. A majority of the members of the Compensation Committee
shall constitute a quorum and all actions of the Compensation Committee
shall be taken by a majority of the members present at any meeting. Any
action of the Compensation Committee may be taken by an instrument or
instruments in writing signed by all the members of the Compensation
Committee entitled to vote on the action, and any action so taken shall
be as effective as if it had been passed by a majority of the votes cast
by the members of the Compensation Committee present at a meeting of
such members duly called and held.
3.3 The Compensation Committee shall have the power, where consistent with
the general purpose and intent of the Plan and subject to the specific
provisions of the Plan:
(a) to establish policies and to adopt rules and regulations for carrying
out the purposes, provisions and administration of the Plan;
(b) to interpret and construe the Plan and to determine all questions
arising out of the Plan and any Option granted pursuant to the Plan,
and any such interpretation, construction or determination made by the
Compensation Committee shall be final, binding and conclusive for all
purposes;
(c) to determine to which Eligible Persons Options will be granted and to
make recommendations to the Board with respect to the granting of
Options;
(d) to determine the number of Shares covered by each Option;
(e) to determine the time or times when Options will be granted and
exercisable;
(f) to determine if the Shares which are subject to an Option will be
subject to any restrictions upon the exercise of such Option; and
(g) to prescribe the form of the instruments relating to the grant,
exercise and other terms of Options.
3.4 No member of the Compensation Committee shall, during the currency of
his or her membership on the Compensation Committee, be entitled to vote
on any resolution to approve his or her participation in the Plan.
F-2
ARTICLE 4
SHARES SUBJECT TO PLAN
4.1 Options may be granted in respect of authorized and unissued Shares
provided that the maximum number of Shares that may be issued upon the
exercise of Options granted pursuant to the Plan shall be 5,500,000. The
Shares in respect of which Options are not exercised shall be available
for subsequent Options under the Plan. No fractional Shares may be
purchased or issued under the Plan.
ARTICLE 5
ELIGIBILITY, GRANT AND TERMS OF OPTIONS
5.1 Options may be granted to any Eligible Person from time to time.
5.2 Options may be granted by the Corporation pursuant to recommendations of
the Compensation Committee provided and to the extent that such
recommendations are approved by the Board.
5.3 Except as otherwise specifically provided in this Article 5, the number
of Shares subject to each Option, the expiration date of each Option,
the extent to which each Option is exercisable from time to time during
the term of the Option and other terms and conditions relating to each
such Option shall be determined by the Compensation Committee; provided,
however, that if no specific determination is made by the Compensation
Committee with respect to any of the following matters, each Option
shall, subject to any other specific provisions of the Plan, contain the
following terms and conditions:
(a) the period during which an Option shall be exercisable shall be five
years from the date the Option is granted to the Optionee; and
(b) the Optionee may take up and pay for not more than 33 1/3% of the
Shares covered by the Option during each 12 month period following the
first anniversary of the date of the grant of the Option; provided,
however, that if the number of Shares taken up under the Option during
any such 12 month period is less than 33 1/3% of the Shares covered by
the Option, the Optionee shall have the right, at any time or from time
to time during the remainder of the term of the Option, to purchase
such number of Shares subject to the Option which were purchasable, but
not purchased by him or her, during such 12 month period.
5.4 The Option Price on Shares which are the subject of any Option shall be
determined by the Board at the time of the grant of the Options provided
that in no circumstances shall the Option Price be lower than the Market
Price of the Shares.
5.5 In no event may the term of an Option exceed ten years from the date of
the grant of the Option.
5.6 The Board confirms the grant of Replacement Options under the Plan
pursuant to the Arrangement. Notwithstanding any other provision hereof,
the number of Shares subject to a Replacement Option, the expiration
date of such Replacement Option, the extent to which such Replacement
Option is exercisable from time to time during the term of such
Replacement Option, the vesting schedule and other terms and conditions
relating to such Replacement Option shall be the same as those terms of
the Replaced Option in respect of which such Replacement Option has been
issued except that the Option Price shall be the exercise price of such
Replaced Option less $0.04.
5.7 The total number of Shares to be optioned to any Optionee under this
Plan together with any Shares reserved for issuance under options for
services and employee share purchase plans or any other plans to such
Optionee shall not exceed 5% of the issued and outstanding Shares at the
date of the grant of the Option.
5.8 Each Option is personal to the Optionee and is non-assignable.
ARTICLE 6
TERMINATION OF EMPLOYMENT; DEATH
6.1 Subject to Article 6.2 hereof and to any express resolution passed by
the Compensation Committee with respect to an Option, an Option and all
rights to purchase Shares pursuant thereto shall expire and terminate
immediately upon the Optionee ceasing to be an Eligible Person.
F-3
6.2 If, before the expiry of an Option in accordance with the terms thereof,
the employment of the Optionee by the Corporation or by any Subsidiary
of the Corporation shall terminate for any reason whatsoever other than
termination by the Corporation for cause, but including termination by
reason of the death of the Optionee, such Option may, subject to the
terms thereof and any other terms of the Plan, be exercised, if the
Optionee is deceased, by the legal personal representative(s) of the
estate of the Optionee during the first six months following the death
of the Optionee, or if he is alive, by the Optionee, at any time within
six months of the date of termination of the employment of the Optionee
(but in either case prior to the expiry of the Option in accordance with
the terms thereof), but only to the extent that the Optionee was
entitled to exercise such Option at the date of the termination of his
or her employment.
6.3 Options shall not be affected by any change of employment of the
Optionee or by the Optionee ceasing to be an Eligible Person.
ARTICLE 7
EXERCISE OF OPTIONS
7.1 Subject to the provisions of the Plan, an Option may be exercised from
time to time by delivery to the Corporation at its registered office of
a written notice of exercise addressed to the Secretary of the
Corporation specifying the number of Shares with respect to which the
Option is being exercised and accompanied by payment in full of the
Option Price of the Shares to be purchased. Certificates for such Shares
shall be issued and delivered to the Optionee within a reasonable time
following the receipt of such notice and payment.
7.2 Notwithstanding any of the provisions contained in the Plan or in any
Option, the Corporation's obligation to issue Shares to an Optionee
pursuant to the exercise of an Option shall be subject to:
(a) completion of such registration or other qualification of such Shares
or obtaining approval of such governmental authority as the
Corporation shall determine to be necessary or advisable in
connection with the authorization, issuance or sale thereof;
(b) the admission of such Shares to listing on any stock exchange on
which the Shares may then be listed; and
(c) the receipt from the Optionee of such representations, agreements and
undertakings, including as to future dealings in such Shares, as the
Corporation or its counsel determines to be necessary or advisable in
order to safeguard against the violation of the securities laws of
any jurisdiction.
In this connection, the Corporation shall, to the extent necessary, take
all reasonable steps to obtain such approvals, registrations and
qualifications as may be necessary for the issuance of such Shares in
compliance with applicable securities laws and for the listing of such
Shares on any stock exchange on which the Shares are then listed.
ARTICLE 8
CERTAIN ADJUSTMENTS
8.1 Appropriate adjustments in the number of Shares subject to the Plan, and
as regards Options granted or to be granted, in the number of Shares
optioned and in the Option Price, shall be made by the Board to give
effect to adjustments in the number of Shares of the Corporation
resulting from subdivisions, consolidations or reclassifications of the
Shares of the Corporation, the payment of share dividends by the
Corporation (other than dividends in the ordinary course) or other
relevant changes in the capital stock of the Corporation. The Board's
determination of such adjustments shall be final, binding and conclusive
for all purposes.
ARTICLE 9
AMENDMENT OR DISCONTINUANCE OF PLAN
9.1 Subject to obtaining any required regulatory approvals, the Board may
amend or discontinue the Plan at any time; provided, however, that no
such amendment may, without the consent of the Optionee, alter or
impair any Option previously granted to an Optionee under the Plan.
F-4
ARTICLE 10
MISCELLANEOUS PROVISIONS
10.1 The holder of an Option shall not have any rights as a shareholder of
the Corporation with respect to any of the Shares covered by such
Option until such holder has exercised such Option in accordance with
the terms of the Plan (including tendering payment in full of the
Option Price of the Shares in respect of which the Option is being
exercised) and the Corporation shall have issued such Shares to the
Optionee in accordance with the terms of the Plan in those
circumstances.
10.2 Nothing in the Plan or any Option shall confer upon any Optionee any
right to continue in the employ of the Corporation or any Subsidiary of
the Corporation or affect in any way the right of the Corporation or
any such Subsidiary to terminate his or her employment at any time; nor
shall anything in the Plan or any Option be deemed or construed to
constitute an agreement, or an expression of intent, on the part of the
Corporation or any such Subsidiary to extend the employment of any
Optionee beyond the time which he would normally be retired pursuant to
the provisions of any present or future retirement plan of the
Corporation or any Subsidiary or any present or future retirement
policy of the Corporation or any Subsidiary, or beyond the time at
which he would otherwise be retired pursuant to the provisions of any
contract of employment with the Corporation or any Subsidiary.
10.3 (a) In the event the Corporation proposes to amalgamate (other than an
amalgamation with a subsidiary), merge or consolidate with any other
corporation or to liquidate, dissolve or wind-up, the Corporation shall
give written notice thereof to each Optionee and permit each Optionee
to exercise his or her Options within the 45-day period next following
the giving of such notice, failing which, all rights of the Optionee
with respect to his or her Options or to exercise the same shall
terminate and cease to have any further force or effect whatsoever.
(b) If, at any particular time, an Option is otherwise exercisable as to
part only of the Shares to which the Option relates or is not exercisable
at all because of a vesting period and in the event that a Public Take-
over Bid (as hereinafter defined) is made, the holder of the Option may
at any time thereafter exercise the Option with respect to all the Shares
to which the Option relates. For purposes of this Section 10.3(b)(i) and
(ii), "Public Take-over Bid" means any of the following:
(i) a take-over bid, as that term is defined in Section 6-101 of
Appendix F to The Toronto Stock Exchange Company Manual, made for
the Shares of the Corporation through the facilities of The Toronto
Stock Exchange or a take-over bid for the Shares of the Corporation
made through the facilities of any other stock exchange in Canada
under the governing rules and regulations of such stock exchange;
and
(ii) a bid for the Shares of the Corporation in respect of which a
take-over bid circular is prepared and delivered to shareholders of
the Corporation pursuant to the provisions of the securities
legislation of any Province of Canada.
10.4 Any dispute or disagreement which shall arise under or as a result of,
or in any way related to, the interpretation, construction on
application of this Plan shall be determined by the Board. Any such
determination shall be final, binding and conclusive for all purposes.
10.5 Upon the exercise of an Option, the Optionee shall make arrangements
satisfactory to the Corporation regarding payment of any federal,
provincial or local taxes of any kind required by law to be withheld
with respect to the exercise of the Option. In addition, the
Corporation shall, to the extent permitted by law, have the right to
deduct from any payment of any kind due to the Optionee any federal,
provincial or local taxes of any kind required by law to be withheld
with respect to the exercise of the Option.
10.6 Grammatical variations of any terms defined herein have similar
meanings. Words importing the singular number shall include the plural
and vice versa and words importing the use of any gender shall include
all genders. The division of this Plan into separate Articles and
Sections, and the insertion of headings are for convenience of
reference only and shall not affect the construction or interpretation
of this Plan.
F-5
ARTICLE 11
SHAREHOLDER AND REGULATORY APPROVAL
11.1 The Plan and the exercise of the Options granted under the Plan shall
be subject to the condition that if at any time the Corporation shall
determine in its sole discretion that it is necessary or desirable to
comply with any legal requirements or the requirements of any stock
exchange or other regulatory authority or to obtain any approval or
consent from any such stock exchange or other regulatory authority as a
condition of, or in connection with the Plan or the exercise of the
Options granted under the Plan or the issue of Shares as a result
thereof, then in any such event, any Options granted prior to such
approval and acceptance shall be conditional upon such compliance
having been effected or such approval or consent having been given and
no such Options may be exercised unless and until such compliance is
effected or until such approval or consent is given on conditions
satisfactory to the Corporation in its sole discretion.
IN WITNESS WHEREOF, Hemosol Corp. has executed this amended and restated
Plan as of the -- day of -- , 2004.
HEMOSOL CORP.
by
--------------------------------------
--------------------------------------
F-6
ANNEX G -- SUMMARY HISTORICAL FINANCIAL INFORMATION FOR HEMOSOL
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data in the tables below for each of the
years ended December 31, 2001, 2002 and 2003 has been derived from the following
Hemosol audited consolidated financial statements:
- consolidated balance sheet as at December 31, 2001, 2002 and 2003; and
- consolidated statement of loss and deficit for the years ended December
31, 2001, 2002 and 2003.
All information contained in these following tables should be read in
conjunction with Hemosol's Audited Financial Statements incorporated by
reference in this Circular.
The summary financial information contained in these following tables and
Hemosol's consolidated financial statements have been prepared in accordance
with Canadian GAAP. A reconciliation of the summary financial information to
U.S. GAAP and summary financial information of Hemosol prepared in accordance
with U.S. GAAP are also provided. For a discussion of the principal differences
between Canadian GAAP and U.S. GAAP, see note 19 to Hemosol's audited
consolidated financial statements for the year ended December 31, 2003
incorporated by reference in this Circular.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2001 2002 2003
------- ------- -------
$ $ $
(In thousands,
except per share data)
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT
Revenues.................................................... -- -- --
------- ------- -------
Operating expenses.......................................... 41,479 47,425 32,113
------- ------- -------
Operating loss.............................................. (41,479) (47,425) (32,113)
Amortization of deferred charges............................ (360) (1,587) (5,009)
Write-off of deferred charges............................... -- (6,453) --
Interest expense............................................ -- -- (688)
Interest income............................................. 3,488 842 153
Miscellaneous income........................................ -- -- 2,871
------- ------- -------
Loss before income taxes.................................... (38,351) (54,623) (34,786)
Provision for income taxes.................................. (226) (211) (156)
------- ------- -------
Net loss.................................................... (38,577) (54,834) (34,942)
======= ======= =======
Basic and diluted net loss per common share................. (0.98) (1.23) (0.75)
======= ======= =======
Weighted average number of common shares used in computing
basic and diluted net loss per common share (rounded to
nearest thousand)......................................... 39,215 44,514 46,837
</Table>
<Table>
<Caption>
AS AT DECEMBER 31,
------------------------------
2001 2002 2003
-------- -------- --------
$ $ $
(In thousands)
CONSOLIDATED BALANCE SHEET DATA
Total current assets........................................ 74,724 26,533 10,582
Total non-current assets.................................... 69,693 97,779 89,795
Total assets................................................ 144,417 124,312 100,377
Total current liabilities................................... 13,605 20,249 23,394
Total non-current liabilities............................... -- -- --
Common shares............................................... 282,644 303,463 305,953
Non-employee warrants and options........................... 3,034 10,300 15,642
Deficit..................................................... (163,401) (218,235) (253,177)
Net assets.................................................. 130,812 104,063 76,983
</Table>
G-1
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
Operating results that would differ under U.S. GAAP are as follows:
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
---------------------------
2001 2002 2003
------- ------- -------
$ $ $
(In thousands,
except per share data)
CONSOLIDATED STATEMENT OF LOSS AND DEFICIT (U.S. GAAP)
Revenues.................................................... -- -- --
Operating expenses.......................................... 42,423 47,637 33,825
Net loss and comprehensive loss............................. (39,521) (55,046) (36,654)
Net loss per share.......................................... (1.01) (1.24) (0.78)
Weighted average number of common shares outstanding,
(rounded to the nearest thousand share)................... 39,168 44,514 46,837
</Table>
<Table>
<Caption>
AS AT DECEMBER 31,
------------------------------
2001 2002 2003
-------- -------- --------
$ $ $
(In thousands)
CONSOLIDATED BALANCE SHEET DATA (U.S. GAAP)
Total current assets........................................ 74,342 26,533 10,582
Total non-current assets.................................... 67,729 95,603 85,907
Total assets................................................ 142,071 122,136 96,489
Total current liabilities................................... 13,605 20,249 23,394
Total non-current liabilities............................... -- -- --
Common shares............................................... 282,262 303,463 305,953
Non-employee warrants and options........................... 3,034 10,300 15,642
Deficit..................................................... (165,365) (220,411) (257,065)
Net assets.................................................. 128,466 101,887 73,095
</Table>
Hemosol prepares its consolidated financial statements in accordance with
Canadian GAAP, which differ in certain material respects from U.S. GAAP.
The material differences as they apply to the summary financial information
above are as follows:
(a) Balance sheet adjustments:
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
$ $ $
AMOUNTS RECEIVABLE AND PREPAIDS
Balance under Canadian GAAP................................. 3,156 1,077 735
Adjustment for employee stock purchase loans(1)............. (382) -- --
-------- -------- --------
BALANCE UNDER U.S. GAAP..................................... 2,774 1,077 735
======== ======== ========
PATENTS AND TRADEMARKS
Balance under Canadian GAAP................................. 1,964 2,176 1,368
Adjustment for patents and trademarks(2).................... (1,964) (2,176) (1,368)
-------- -------- --------
BALANCE UNDER U.S. GAAP..................................... -- -- --
======== ======== ========
LICENSE TECHNOLOGY
Balance under Canadian GAAP................................. -- -- 2,520
Adjustment for license technology(3)........................ -- -- (2,520)
-------- -------- --------
BALANCE UNDER U.S. GAAP..................................... -- -- --
======== ======== ========
</Table>
G-2
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
$ $ $
COMMON SHARES
Balance under Canadian GAAP................................. 282,644 303,463 305,983
Adjustment for employee stock purchase loans(1)............. (382) -- --
-------- -------- --------
BALANCE UNDER U.S. GAAP..................................... 282,262 303,463 305,983
======== ======== ========
DEFICIT
Balance under Canadian GAAP................................. (163,401) (218,235) (253,177)
Adjustment for patents and trademarks(2).................... (1,964) (2,176) (1,368)
Adjustment for license technology(3)........................ -- -- (2,520)
-------- -------- --------
BALANCE UNDER U.S. GAAP..................................... (165,365) (220,411) (257,065)
======== ======== ========
BOOK VALUE PER SHARE........................................ 3.19 2.26 1.39
======== ======== ========
</Table>
(1) EMPLOYEE STOCK PURCHASE PLAN
Under Canadian GAAP, loans provided to employees for the purchase of shares
may be either recorded as amounts receivable or deducted from share capital,
depending on certain criteria. Under U.S. GAAP, such loans must be deducted
from share capital.
(2) PATENTS AND TRADEMARKS
Under Canadian GAAP, patent and trademark costs are carried at cost less
accumulated amortization and are amortized on a straight-line basis over
their estimated economic life. Under U.S. GAAP, these costs are generally
expensed as incurred.
(3) LICENSE TECHNOLOGY
Under U.S. GAAP, acquired research and development having no alternative
future use must be written-off at the time of acquisition. The adjustment
represents the value of the license technology capitalized under Canadian
GAAP.
(4) JOINTLY CONTROLLED ENTERPRISE
For the 2002 consolidated financial statements, the investment in 1555195
Ontario Inc. is proportionately consolidated under Canadian GAAP. This
investment is accounted for using the equity method under U.S. GAAP. The
Company relies on an accommodation available under certain conditions which
permits the Company to omit disclosure of the differences in classification
that arise. The joint venture in 1555195 Ontario Inc. qualifies for this
accommodation on the basis that it is an operating entity, the significant
financial and operating policies of which are, by contractual arrangement,
jointly controlled by all parties having an equity interest in the entity.
(b) The components of stockholders' equity under U.S. GAAP are as follows:
<Table>
<Caption>
2001 2002 2003
-------- -------- --------
$ $ $
Common shares............................................... 282,262 303,463 305,983
Non-employee warrants and options........................... 3,034 10,300 15,642
Contributed surplus......................................... 8,535 8,535 8,535
Deficit accumulated during the development stage............ (165,365) (220,411) (257,065)
-------- -------- --------
128,466 101,887 73,095
======== ======== ========
</Table>
G-3
SUMMARY CONSOLIDATED FINANCIAL DATA (CONTINUED)
(c) Reconciliation of net loss under Canadian and U.S. GAAP:
<Table>
<Caption>
2001 2002 2003
------- ------- -------
$ $ $
Net loss for the year, under Canadian GAAP.................. (38,577) (54,834) (34,942)
Adjustment for patents and trademarks....................... (944) (212) 808
Adjustment for license technology........................... -- -- (2,520)
------- ------- -------
NET LOSS AND COMPREHENSIVE LOSS, UNDER U.S. GAAP............ (39,521) (55,046) (36,654)
======= ======= =======
NET LOSS PER SHARE, UNDER U.S. GAAP......................... (1.01) (1.24) (0.78)
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, UNDER
U.S. GAAP [ROUNDED TO THE NEAREST THOUSAND SHARE]......... 39,168 44,514 46,837
======= ======= =======
</Table>
G-4
ANNEX H -- BALANCE SHEET OF NEW HEMOSOL
AUDITOR'S REPORT
To the Directors of
HEMOSOL CORP.
We have audited the balance sheet of HEMOSOL CORP. as at February 24, 2004.
The balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on the balance sheet based on our audit.
We conducted our audit in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principals used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation.
In our opinion, the balance sheet presents fairly, in all material
respects, the financial position of the Company as at February 24, 2004 in
accordance with Canadian generally accepted accounting principles.
<Table>
Toronto, Canada (Signed) ERNST & YOUNG LLP
March 10, 2004 Chartered Accountants
</Table>
H-1
HEMOSOL CORP.
BALANCE SHEET
AS AT FEBRUARY 24, 2004
<Table>
ASSETS
Cash........................................................ $ 1
===
SHAREHOLDER'S EQUITY
Shareholder's capital....................................... $ 1
===
</Table>
See accompanying notes.
On behalf of the Board of Directors:
<Table>
(Signed) LEE HARTWELL
</Table>
H-2
HEMOSOL CORP.
NOTES TO BALANCE SHEET
FEBRUARY 24, 2004
1. Nature of Operations
Hemosol Corp. was incorporated on February 24, 2004 under the Business
Corporations Act (Ontario) and is a wholly-owned subsidiary of Hemosol Inc.
Hemosol Corp. has not carried on any active business since incorporation.
2. Basis of Presentation
This balance sheet has been prepared in accordance with Canadian generally
accepted accounting principles (GAAP), which are the same in all applicable
material respects as United States GAAP.
As of February 24, 2004, Hemosol Corp. has no revenues, expenses or cash
flows, except for $1.00 of share capital, and consequently, statements of
earnings and cash flows have not been presented.
3. Share Capital
Authorized: unlimited number of common shares and unlimited number of
special shares issuable in series.
4. Subsequent Event
On February 12, 2004, Hemosol Inc. announced that it has entered into an
agreement with MDS Inc. ("MDS"), a related party, regarding a proposed
reorganization of Hemosol Inc.'s business that will allow the Hemosol Inc.
business to benefit from a significant portion of its existing and
unutilized income tax losses and other tax assets through a transaction that
will result in the Hemosol Inc. business receiving $16 million of cash.
The transaction will be effected under a statutory Plan of Arrangement (the
"Arrangement") that will be subject to approval by the Superior Court of
Justice of Ontario and the shareholders and warrantholders of Hemosol Inc.,
as well as certain regulatory approvals. It is expected that a special
meeting of Hemosol Inc.'s shareholders and warrantholders to consider and
vote on the Arrangement will be held as soon as possible and no later than
April 30, 2004. The Arrangement must be approved by two-thirds of the votes
cast by the shareholders and warrantholders of Hemosol Inc. voting at the
shareholders' meeting and by the majority of the votes cast by shareholders
and warrantholders of Hemosol Inc., excluding MDS, voting at the meeting.
As part of the transaction, shareholders of Hemosol Inc. will exchange each
common share of Hemosol Inc. for one common share of Hemosol Corp., which
will be the successor to substantially all of Hemosol Inc.'s current
business, and one Class A common share of Hemosol Inc. [to be renamed LPBP
Inc. ("Labco")] which will acquire an indirect interest in the clinical
laboratory services business currently carried on by MDS. Following the
transaction, Hemosol Corp. will be held by existing shareholders of Hemosol
Inc. on the same pro rata basis as Hemosol Inc. was held prior to the
transaction. MDS currently holds approximately 11.7% of the outstanding
shares of Hemosol Inc. Hemosol Corp. will own a 93% equity interest in a new
partnership that will carry on Hemosol Inc.'s current and future business,
with the remaining 7% being owned by Labco. MDS will hold 99.56% of the
equity of Labco and existing Hemosol Inc. shareholders will hold the
remaining 0.44% through the Class A common shares to be issued [representing
not less than 52.5% of the voting securities of Labco]. It is a condition of
closing that Hemosol Corp. be listed on the TSX and NASDAQ.
Also as part of the transaction, Hemosol Inc. will decrease the total number
of warrants issued, or to be issued, to MDS as consideration for the
previously disclosed guarantee by MDS of Hemosol Inc.'s $20 million credit
facility, from an aggregate of 10,000,000 warrants to a total of 7,500,000
warrants which will become Hemosol Corp. warrants.
H-3
ANNEX I -- PRO FORMA FINANCIAL STATEMENTS FOR NEW HEMOSOL
COMPILATION REPORT ON PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
To the Directors of Hemosol Corp.:
We have read the accompanying unaudited pro forma consolidated balance
sheet of Hemosol Corp. ("Hemosol" or the "Company") as at December 31, 2003 and
the unaudited pro forma consolidated statement of loss for the year then ended,
and have performed the following procedures.
1. Compared the figures in the columns captioned "Hemosol Inc." to the audited
consolidated financial statements of Hemosol Inc. as at December 31, 2003
and for the year then ended, respectively, and found them to be in
agreement.
2. Compared the figures in the columns captioned "Hemosol Corp." to the audited
balance sheet of the Company as at February 24, 2004 and found them to be in
agreement.
3. Made enquiries of certain officials of the Company who have responsibility
for financial and accounting matters about:
(a) the basis for determination of the pro forma adjustments; and
(b) whether the pro forma consolidated financial statements comply as to
form in all material respects with the applicable requirements of
National Instrument 44-101.
The officials:
(a) described to us the basis for determination of the pro forma
adjustments, and
(b) stated that the pro forma consolidated statements comply as to form in
all material respects with the applicable requirements of National
Instrument 44-101.
4. Read the notes to the pro forma consolidated financial statements, and found
them to be consistent with the basis described to us for determination of the
pro forma adjustments.
5. Recalculated the application of the pro forma adjustments to the aggregate of
the amounts in the columns captioned "Hemosol Corp." as at February 24, 2004
and "Hemosol Inc." as at December 31, 2003 and for the year then ended and
found the amounts in the column captioned "Pro Forma Consolidated" to be
arithmetically correct.
A pro forma financial statement is based on management assumptions and
adjustments which are inherently subjective. The foregoing procedures are
substantially less than either an audit or a review, the objective of which is
the expression of assurance with respect to management's assumptions, the pro
forma adjustments, and the application of the adjustments to the historical
financial information. Accordingly, we express no such assurance. The foregoing
procedures would not necessarily reveal matters of significance to the pro forma
consolidated financial statements, and we therefore make no representation about
the sufficiency of the procedures for the purposes of a reader of such
statements.
Toronto, Canada (Signed) ERNST & YOUNG LLP
March 10, 2004 Chartered Accountants
COMMENTS FOR UNITED STATES READERS ON DIFFERENCE
BETWEEN CANADIAN AND UNITED STATES REPORTING STANDARDS
The above report, provided solely pursuant to Canadian requirements, is
expressed in accordance with standards of reporting generally accepted in Canada
which contemplates the expression of an opinion with respect to the compilation
of pro forma financial statements. United States standards do not provide for
the expression of an opinion on the compilation of pro forma financial
statements. To report in conformity with United States standards on the
reasonableness of the pro forma adjustments and their application to the pro
forma financial statements requires an examination or review which would be
substantially greater in scope than the review as to compilation only that we
have conducted. Consequently, under United States standards we would be unable
to express an opinion with respect to the compilation of the accompanying
unaudited pro forma consolidated balance sheet and the unaudited pro forma
consolidated statement of loss.
Toronto, Canada (Signed) ERNST & YOUNG LLP
March 10, 2004 Chartered Accountants
I-1
HEMOSOL CORP.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS AT DECEMBER 31, 2003
(in thousands of dollars)
<Table>
<Caption>
HEMOSOL INC. AS AT
HEMOSOL CORP. AS AT DECEMBER 31, PRO FORMA PRO FORMA
FEBRUARY 24, 2004 2003 ADJUSTMENTS NOTES CONSOLIDATED
------------------- ------------------ ----------- --------- ------------
ASSETS
CURRENT
Cash and cash equivalents.......... -- 8,125 13,100 2.1 21,225
Cash held in escrow................ -- 448 1,000 2.1 1,448
Amounts receivable and prepaids.... -- 735 735
Inventory.......................... -- 1,274 1,274
-------- -------- --------
TOTAL CURRENT ASSETS............... -- 10,582 24,682
-------- -------- --------
OTHER
Property, plant and equipment,
net.............................. -- 83,881 83,881
Patents and trademarks, net........ -- 1,368 1,368
License technology................. -- 2,520 2,520
Deferred charges, net.............. -- 2,026 2,026
-------- -------- --------
TOTAL OTHER ASSETS................. -- 89,795 89,795
-------- -------- --------
100,377 114,477
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued
liabilities...................... -- 3,394 3,394
Short-term debt.................... -- 20,000 20,000
-------- -------- --------
TOTAL CURRENT LIABILITIES.......... -- 23,394 23,394
-------- -------- --------
LONG TERM LIABILITIES.............. --
Minority interest.................. -- -- 6,376 2.2, 2.4 6,376
Future tax liability............... -- -- 5,500 2.5 5,500
-------- -------- --------
TOTAL LONG TERM LIABILITIES........ -- -- 11,876
-------- -------- --------
23,394 35,270
======== ======== ========
SHAREHOLDERS' EQUITY
Common shares...................... -- 305,983 305,983
Non-employee warrants and
options.......................... -- 15,642 (590) 2.3 15,052
Contributed surplus................ -- 8,535 590 2.3 9,125
Deficit............................ -- (253,177) 2,224 2.1, 2.2, (250,953)
-------- -------- --------
2.4, 2.5
TOTAL SHAREHOLDERS' EQUITY......... -- 76,983 79,207
-------- -------- --------
100,377 114,477
======== ======== ========
</Table>
I-2
HEMOSOL CORP.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF LOSS
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands of dollars, except per share data)
<Table>
<Caption>
HEMOSOL INC.
FOR THE YEAR ENDED
DECEMBER 31, PRO FORMA PRO FORMA
2003 ADJUSTMENTS NOTES CONSOLIDATED
------------------ ----------- ----- ------------
EXPENSES
Research and development
Scientific and process............................ 10,773 2,537 3.2 13,310
Regulatory and clinical........................... 5,817 58 3.2 5,875
Administration...................................... 6,586 2,285 3.2 8,871
Marketing and business development.................. 1,760 1,760
Support services.................................... 1,297 39 3.2 1,336
Write-off of property, plant and equipment.......... 4,654 4,654
Write-off of patents and trademarks................. 846 846
Foreign currency translation........................ 380 380
------ ------
Loss from operations................................ 32,113 37,032
Amortization of deferred charges.................... 5,009 5,009
Interest income..................................... (153) (153)
Interest expense.................................... 688 688
Miscellaneous income................................ (2,871) (2,871)
------ ------
Loss before income taxes............................ 34,786 39,705
Provision for income taxes.......................... 156 156
------ ------
Net loss before minority interest................... 34,942 39,861
Minority interests' share of net loss............... -- (2,446) 3.1 (2,446)
------ ------
Net loss for the year............................... 34,942 3.3 37,415
====== ======
Net loss per share.................................. 0.75 0.80
====== ======
Weighted average number of common shares
outstanding....................................... 46,837 46,837
====== ======
</Table>
I-3
HEMOSOL CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 24, 2004
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS NOTED)
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma consolidated financial statements of
Hemosol Corp. ("New Hemosol") have been prepared to reflect the impact of a
Plan of Arrangement contemplated by an Arrangement Agreement dated as of
February 11, 2004 involving Hemosol Inc. ("Hemosol"), its securityholders,
and MDS Inc. that will allow Hemosol's business to benefit from a significant
portion of its existing and unutilized income tax losses and other tax assets
through a transaction that will result in the Hemosol Inc. business receiving
$16 million of cash.
The accompanying unaudited pro forma consolidated balance sheet as at
December 31, 2003 and the unaudited pro forma consolidated statement of loss
for the year ended December 31, 2003 have been prepared by management of New
Hemosol using the accounting policies disclosed in the consolidated financial
statements of Hemosol. In the opinion of management of New Hemosol, the
unaudited pro forma consolidated balance sheet and the unaudited pro forma
consolidated statement of loss include all adjustments necessary for the fair
presentation of the proposed transaction in accordance with Canadian
generally accepted accounting principles. The impact of material differences
between Canadian and U.S. generally accepted accounting principles is set out
in note 4.
The unaudited pro forma consolidated balance sheet and unaudited pro forma
consolidated statement of loss have been prepared from the audited
consolidated financial statements of Hemosol as at and for the year ended
December 31, 2003, and the audited balance sheet of New Hemosol as at
February 24, 2004. The unaudited pro forma consolidated balance sheet has
been prepared as if the reorganization occurred on December 31, 2003, and the
unaudited consolidated statement of loss for the year ended December 31, 2003
has been prepared as if the reorganization had occurred on January 1, 2003.
The unaudited pro forma consolidated financial statements are not intended to
present or be indicative of the consolidated financial position and the
consolidated results of operations that would have occurred if the
transactions had been in effect on the dates indicated or the financial
position or operating results that may be obtained in the future. In
preparing these unaudited pro forma consolidated financial statements, except
as otherwise noted, no adjustments have been made to reflect transactions
which have occurred since the dates indicated.
2. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following assumptions and adjustments have been made to the consolidated
balance sheet of New Hemosol as at February 24, 2004 and Hemosol as at
December 31, 2003 to reflect the transaction described in note 1 as if the
transaction had occurred on December 31, 2003:
2.1 Benefit of the Arrangement
To record cash receipt of $14.1 million, net of estimated transaction
expenses of approximately $1.9 million, arising from the arrangement,
including $1 million to be held in escrow.
2.2 Minority Interest
To reflect the 7% minority interest in the business that is controlled by
New Hemosol.
2.3 Reduction of 500,000 warrants
To record a $590 increase in contributed surplus and reduction in share
capital resulting from the surrender of 500,000 warrants by MDS Inc.
previously issued and recorded in connection with Hemosol's $20 million
loan with The Bank of Nova Scotia.
2.4 Distribution of 0.44% of Hemosol
To reflect the accounting whereby the shareholders of New Hemosol,
excluding MDS Inc., will receive a 0.44% interest in Hemosol after the
Plan of Arrangement.
2.5 Future tax liability
To reflect the future tax liability that arises from the difference
between the tax basis and accounting basis for the property, plant and
equipment. This future tax liability may be offset by future tax assets
which may include future non-capital operating losses of New Hemosol. No
such future non-capital losses have been reflected in these pro forma
consolidated financial statements.
3. UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
3.1 Minority Interest
To reflect the 7% minority interests' share of losses.
3.2 Stock Option Expense
In October 2003, Hemosol's board of directors approved the grant of an
aggregate of 2,766,225 options to certain executives of Hemosol, which
options (a) may be exercised to purchase common shares at an exercise
price of $0.90 per share, (b) will fully vest on October 29, 2004 subject
to Hemosol attaining certain prescribed targets and (c) will otherwise be
subject to the terms and conditions of Hemosol's stock option plan. In
addition, in December 2003, Hemosol's board of directors approved the
grant of an aggregate of up to 775,000 options to Hemosol's directors and
non-executive employees, which options may be exercised to purchase
common shares
I-4
HEMOSOL CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 24, 2004
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS NOTED)
at an exercise price of $1.60 per share and will be subject to the terms
and conditions (including vesting) of Hemosol's stock option plan. All of
these options were granted subject to shareholder and regulatory
approval. These options have been expensed and recorded as an addition to
share capital in the pro forma financial statements as if they had been
issued on January 1, 2003.
The fair value of all options granted during the year was estimated using
the Black-Scholes option pricing model with the following weighted
average assumptions:
<Table>
<Caption>
2003
-----
Expected option life [years]................................ 2.7
Volatility.................................................. 0.96
Risk-free interest rate..................................... 2.5%
Dividend yield.............................................. 0.0%
</Table>
The Black-Scholes model, used by Hemosol to calculate option values, as
well as other accepted option valuation models, were developed to
estimate fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from Hemosol's
stock option awards. These models also require four highly subjective
assumptions, including future stock price volatility and expected time
until exercise, which greatly affect the calculated values.
3.3 Net loss for the year
The estimated net gain on this transaction amounting to $4,921 has not
been recognized in the pro forma consolidated statement of loss. The
estimated net gain comprises cash of $16,000 and the fair value of the
0.44% interest in Hemosol after the Plan of Arrangement of $2,900, less
the 7% minority interest in the business that is controlled by New
Hemosol of $6,579, future tax liabilities of $5,500 and estimated
transaction costs of $1,900.
4. RECONCILIATION OF PRO FORMA RESULTS REPORTED UNDER CANADIAN GAAP WITH U.S.
GAAP
Hemosol prepares its consolidated financial statements in accordance with
Canadian generally accepted principles ("Canadian GAAP"), which differ in
certain material respects from those applicable in the United States ("U.S.
GAAP").
The material differences as they apply to the pro forma consolidated
financial statements are as follows:
<Table>
<Caption>
YEAR ENDED
PRO FORMA NET LOSS RECONCILIATION DECEMBER 31, 2003
--------------------------------- -----------------
$
Pro forma net loss for the year, under Canadian GAAP........ 37,415
Adjustments:
Adjustment for patents and trademarks(1).................... (808)
Adjustment for license technology(2)........................ 2,520
Minority interest's share of net losses(3).................. (120)
------
Pro forma net loss and comprehensive loss for the year,
under U.S. GAAP........................................... 39,007
======
Pro forma net loss per share, under U.S. GAAP............... 0.83
======
</Table>
I-5
HEMOSOL CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 24, 2004
(ALL DOLLAR AMOUNTS IN THOUSANDS, EXCEPT AS NOTED)
<Table>
<Caption>
AS AT
PRO FORMA BALANCE SHEET RECONCILIATION DECEMBER 31, 2003
-------------------------------------- -----------------
$
PATENTS AND TRADEMARKS
Balance under Canadian GAAP............................... 1,368
Adjustment for patents and trademarks(1).................. (1,368)
---------
Balance under U.S. GAAP................................... --
=========
LICENSE TECHNOLOGY
Balance under Canadian GAAP............................... 2,520
Adjustment for license technology(2)...................... (2,520)
---------
Balance under U.S. GAAP................................... --
=========
MINORITY INTEREST
Balance under Canadian GAAP............................... 6,376
Adjustment to minority interest for U.S. GAAP
adjustments(3).......................................... (272)
---------
Balance under U.S. GAAP................................... 6,104
=========
DEFICIT
Balance under Canadian GAAP............................... (250,953)
Adjustment for patents and trademarks(1).................. (1,368)
Adjustment for licence technology(2)...................... (2,520)
Adjustment to minority interest for U.S. GAAP
adjustments(3).......................................... 272
---------
Balance under U.S. GAAP................................... (254,569)
=========
PRO FORMA BOOK VALUE PER SHARE.............................. 1.37
=========
</Table>
(1) Patents and trademarks
Under Canadian GAAP, patent and trademark costs are carried at cost less
accumulated amortization and are amortized on a straight line basis over
their estimated economic life. Under U.S. GAAP, these costs are generally
expensed as incurred.
(2) License technology
Under U.S. GAAP, acquired research and development having no alternative
future use must be written off at the time of acquisition. The adjustment
represents the value of the license technology capitalized under Canadian
GAAP.
(3)Minority interest
Minority interest and its related share of net losses is adjusted to
reflect adjustments to U.S. GAAP.
I-6
ANNEX J -- PRO FORMA FINANCIAL STATEMENTS FOR LABCO
LABCO
PRO FORMA BALANCE SHEET
AS AT DECEMBER 31, 2003
(in thousands of dollars)
<Table>
<Caption>
HEMOSOL INC.
AS AT PRO FORMA PRO FORMA
DECEMBER 31, 2003 ADJUSTMENTS NOTES COMBINED
----------------- ----------- ------------------ ---------
ASSETS
CURRENT
Cash and cash equivalents................ 8,573 (8,573) 4(a)(i) --
Amounts receivable and prepaids.......... 735 (735) 4(a)(i) --
Inventory................................ 1,274 (1,274) 4(a)(i) --
------- -------
TOTAL CURRENT ASSETS..................... 10,582 --
------- -------
OTHER
Investment in Blood Products
Partnership............................ -- 5,389 4(a)(i) 5,389
Investment in Labs Partnership........... -- 33,521 4(a)(ii) 33,521
Future tax asset......................... -- 120,000 4(a)(iii) 120,000
Property, plant and equipment, net....... 83,881 (83,881) 4(a)(i) --
Patents and trademarks, net.............. 1,368 (1,368) 4(a)(i) --
Licence technology....................... 2,520 (2,520) 4(a)(i) --
Deferred charges, net.................... 2,026 (2,026) 4(a)(i) --
------- -------
TOTAL OTHER ASSETS....................... 89,795 158,910
------- -------
100,377 158,910
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued
liabilities............................ 3,394 (3,394) 4(a)(i) --
Short-term debt.......................... 20,000 (20,000) 4(a)(i) --
Due to Labs Partnership.................. 16,000 4(a)(iv) 16,000
------- -------
TOTAL CURRENT LIABILITIES................ 23,394 16,000
------- -------
LONG TERM
Unrealized benefit on acquisition of tax
losses................................. 104,000 4(a)(iii) 104,000
SHAREHOLDERS' EQUITY..................... 76,983 (38,073) 4(a)(i), 4(a)(ii) 38,910
------- -------
100,377 158,910
======= =======
BOOK VALUE PER SHARE..................... $ 1.64 $ 0.003
======= =======
</Table>
J-1
LABCO
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003
(in thousands of dollars except for share information)
<Table>
<Caption>
HEMOSOL INC.
FOR THE YEAR ENDED
DECEMBER 31, PRO FORMA PRO FORMA
2003 ADJUSTMENTS NOTES COMBINED
------------------ ----------- --------- ---------------
EXPENSES
Research and development
Scientific and processes.................. (10,773) 10,773 4(b)(iii) --
Regulatory and clinical................... (5,817) 5,817 4(b)(iii) --
---------- ---------------
Total Research and development.............. (16,590) --
---------- ---------------
Administration.............................. (6,586) 6,586 4(b)(iii) --
Marketing and business development.......... (1,760) 1,760 4(b)(iii) --
Support services............................ (1,297) 1,297 4(b)(iii) --
Write-off of property, plant and equipment
and patents and trademarks................ (5,500) 5,500 4(b)(iii) --
Foreign currency translation loss........... (380) 380 4(b)(iii) --
---------- ---------------
Loss from operations........................ (32,113) --
---------- ---------------
Equity earnings from Labs Partnership....... -- 47,618 4(b)(i) 47,618
Reversal of unrealized tax loss benefit..... 14,900 4(b)(ii) 14,900
Amortization of deferred charges............ (5,009) 5,009 4(b)(iii) --
Interest income............................. 153 (153) 4(b)(iii) --
Interest expense............................ (688) 688 4(b)(iii) --
Miscellaneous income........................ 2,871 (2,871) 4(b)(iii) --
---------- ---------------
Income (loss) before income taxes........... (34,786) 62,518
---------- ---------------
PROVISION FOR INCOME TAXES
Current................................... (156) 156 4(b)(iii) --
Future.................................... 0 (17,200) 4(b)(ii) (17,200)
---------- ---------------
Net Income (loss) for the period............ (34,942) 45,318
========== ===============
Net Income (loss) per share................. $ (0.75) $ 0.004
Weighted average number of common shares
outstanding............................... 46,837,000 11,229,116,600
</Table>
J-2
LABCO
NOTES TO PRO FORMA FINANCIAL STATEMENTS
(all amounts in thousands of dollars, except as noted)
1. DESCRIPTION OF THE PLAN OF ARRANGEMENT
The proposed Plan of Arrangement consists of a series of steps that have the
effect of re-organizing Hemosol Inc. ("Hemosol") and the Labs Business of MDS
Inc. ("MDS") in order to allow the reorganized company to benefit from the
value of certain Hemosol tax losses and undeducted expenditures. The
reorganized company is called Labco (the "Company") herein.
2. BASIS OF PRESENTATION
The accompanying unaudited pro forma financial statements of Labco (the
Company) have been prepared to reflect the impact of a proposed Plan of
Arrangement involving the Company, Hemosol Inc., and MDS Inc.
The accompanying unaudited pro forma balance sheet as at December 31, 2003
and the unaudited pro forma statement of operations for the year ended
December 31, have been prepared by management of the Company using the
accounting policies below. In the opinion of management of the Company, the
unaudited pro forma balance sheet and the unaudited pro forma statement of
operations include all adjustments necessary for the fair presentation of the
proposed transaction in accordance with Canadian generally accepted
accounting principles. The impact of material differences between Canadian
and U.S. generally accepted accounting principles is set out in note 5.
The unaudited pro forma balance sheet and unaudited pro forma statement of
operations have been prepared from the historical consolidated financial
statements of Hemosol Inc. as at December 31, 2003, and from the summary
financial information of the Labs Business as at October 31, 2003. The
unaudited pro forma balance sheet has been prepared as if the re-organization
occurred on December 31, 2003, and the unaudited statement of operations for
the year ended December 31, 2003 as if the re-organization had occurred on
January 1, 2003.
By their nature, the unaudited pro forma financial statements do not purport
to be indicative of the financial position and the results of operations of
the Company that would have occurred if the transaction had been in effect on
the dates indicated or the financial position or operating results that may
be obtained in the future. In preparing these unaudited pro forma financial
statements, except as otherwise noted, no adjustments have been made to
reflect transactions which have occurred since the dates indicated.
3. ACCOUNTING POLICIES
Accounting policies used in the preparation of these unaudited pro forma
financial statements are in accordance with Canadian generally accepted
accounting principles. The impact of material differences between Canadian
and U.S. generally accepted accounting principles is set out in note 5.
Entities which are not controlled and over which the Company does not have
the ability to exercise significant influence are accounted for using the
cost method. Entities which are not controlled but where the Company does
have the ability to exercise significant influence are accounted for using
the equity method.
The Company follows the liability method of accounting for income taxes.
Under this method, future income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities, measured using substantively enacted tax rates and laws which
are expected to be in effect when the differences are expected to reverse.
4. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
The following assumptions and adjustments have been made to the balance sheet
of the Company as of as at December 31, 2003 to reflect the transaction
described in note 1:
(a) Pro Forma Balance Sheet
(i) All assets and liabilities of the Blood Products Business transfer
to the Blood Products Partnership as a pro rata reduction in
shareholders' equity equal to 93% of the value of the net assets
transferred and recognition of a 7% limited partnership investment
in the Blood Products Partnership.
(ii) Investment in Labs Business acquired at 99.99% of the book value of
$34 million in exchange for share capital of Labco.
(iii) Estimated value of Hemosol loss carryforward amounts and unclaimed
tax credits of $120 million has been recorded as a deferred tax
asset, together with an unrealized benefit on acquisition of tax
losses of $104 million.
(iv) To record $16 million loan from the Labs Business to fund redemption
of preferred shares.
(b) Pro Forma Income Statement
(i) To reflect 99.99% equity interest in the Labs Partnership net
income.
(ii) Provision for deferred income taxes at 36% of Labs Business income
for the year and reversal of a portion of the unrealized tax loss
benefit.
(iii) To eliminate Hemosol operation revenues and expenses now accounted
for at cost.
(iv) Pro forma earnings per share have been calculated assuming that
11,229,116,600 Labco shares are issued under the Plan of Arrangement
at the beginning of the respective periods.
J-3
5. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company prepares its consolidated financial statements in accordance with
Canadian generally accepted accounting principles, which differ in certain
material respects from those applicable in the United States.
Under Canadian generally accepted accounting principles, since the Company
does not have the ability to exercise significant influence over the Blood
Products Business, the Company accounts for the Blood Products Business using
the cost method. Under US generally accepted accounting principles, all
limited partnerships are accounted for using the equity method when the
limited partnership interest represents 3-5%. Since the Company has a 7%
interest in the Blood Products Partnership, under US generally accepted
accounting principles, the Blood Products Business would be accounted for
using the equity method. The impact on the pro forma statement of operations
would have been to reduce net income for the period by $2.6 million.
J-4
ANNEX K -- DIRECTORS AND OFFICERS OF HEMOSOL
Set forth below are the names and business addresses of each person who is
a director and executive officer of Hemosol and the present principal occupation
or employment of each such person and the name, principal business and address
of the corporation or other organization in which such occupation or employment
of each such person is conducted. All of the directors and executive officers
have held their present positions or other executive positions with Hemosol or
one or more subsidiaries or associated companies, or with the same or associated
firms or organizations, for the last five years, unless otherwise indicated.
Each person listed below is a citizen of Canada, unless otherwise indicated. No
person listed below has been convicted in a criminal proceeding or has been a
party to any judicial or administrative proceeding during the past five years
resulting in a judgement, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, U.S. federal or state
securities laws, or a finding of any violation of U.S. federal or state
securities laws.
DIRECTORS AND OFFICERS OF HEMOSOL
<Table>
<Caption>
NAME, POSITION WITH HEMOSOL AND CURRENT PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------
Edward K. Rygiel............................. Executive Chairman, MDS Capital Corp.
Chairman of the Board and Director (since May 2003) and Executive Vice President, MDS
100 International Blvd. President and Chief Executive Officer, MDS Capital
Etobicoke, Ontario Corp. (December 1994 to April 2003)
M9W 6J7
George W. Masters............................ Chairman, Biocatalyst Yorkton Inc.
Vice-Chairman of the Board and Director
160 Eglinton Ave East
Suite 600
Toronto, Ontario
M4P 3B5
Mitchell J. Kostuch.......................... President, Kostuch Publications
Director
Suite 101
23 Lesmill Road
Toronto, Ontario
M3B 3P6
R. Ian Lennox................................ Group President & CEO
Director Pharmaceutical & Biotech Markets, MDS (after
September 2002)
100 International Blvd.
Etobicoke, Ontario President and Chief Executive Officer, MDS Drug
M9W 6J7 Discovery & Development, MDS
(April 2000 to September 2002)
President & Chief Executive Officer
Phoenix Life Sciences Inc.
(August 1999 to April 2000)
President and Chief Executive Officer, Drug
Royalty
Corporation Inc. (March 1997 to August 1999)
</Table>
K-1
<Table>
<Caption>
NAME, POSITION WITH HEMOSOL AND CURRENT PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------
Wilfred G. Lewitt............................ Chairman, MDS (since April 1996)
Director
100 International Blvd.
Etobicoke, Ontario
M9W 6J7
Edward E. McCormack.......................... Business Advisor and Independent Director
Director (since June 2003)
30 Golfdale Road President of Almad Investments and Beaver Power
Toronto, Ontario Inc.
M4N 2B6 (January 2000 to June 2003)
CFO of Novopharm Inc. (October 1987 to December
1999)
Robert H. Painter............................ Professor Emeritus: Biochemistry and Immunology,
Director Faculty of Medicine, University of Toronto
(retired)
Residence address:
41 Gatcombe Circle
Richmond Hill, Ontario
L4C 9P5
C. Robert Valeri............................. Director of the Naval Blood Research Laboratory,
Director Professor of Medicine and Research, Professor of
Surgery, Boston University School of Medicine
Citizen of the USA
61 Albany Street
Boston, Massachusetts
02118, USA
Nelson M. Sims............................... President & CEO, Novavax Inc. (since August 2003)
Director
Director of MDS (since March 2001)
Citizen of the USA
Executive with Eli Lilly and Company, including
8320 Guilford Road President of Eli Lilly Canada Inc. (1973 to 2001)
Suite C
Columbia, Maryland
21046 USA
Lee D. Hartwell.............................. President, Chief Executive Officer and Chief
Director, President, Chief Executive Officer Financial Officer, Hemosol
and Chief Financial Officer
Prior thereto, Vice President/Chief Financial
2585 Meadowpine Blvd., Officer, Bracknell Corp.
Mississauga, Ontario
L5N 8H9
</Table>
K-2
<Table>
<Caption>
NAME, POSITION WITH HEMOSOL AND CURRENT PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------------- --------------------------------------------------
Dirk Alkema.................................. Vice President, Operations, Hemosol
2585 Meadowpine Blvd., Prior thereto, Director of Manufacturing, Langford
Mississauga, Ontario Laboratories Ltd. (biological products)
L5N 8H9
David Bell................................... Vice President, Drug Discovery, Hemosol
Vice President, Drug Discovery
Prior thereto, Director, Stem Cell Research
2585 Meadowpine Blvd.,
Mississauga, Ontario Prior thereto, Group Leader, Cancer Biology,
L5N 8H9 BioChem Therapeutics Inc. (a healthcare company)
Michael Mathews.............................. Vice President, U.S. Operations, Hemosol
Vice President, U.S. Operation
Prior thereto, President of the Blood Bank
8 Wood Hollow Road Division, Haemonetics Corporation
Suite 301
Parsippany, New Jersey Prior thereto, executive positions within the
07054 USA merged Baxter Healthcare and American Hospital
Supply corporations
</Table>
K-3
ANNEX L -- DIRECTORS AND OFFICERS OF MDS AND MDS SUBCO
DIRECTORS AND OFFICERS OF MDS
Set forth below are the names, business addresses and telephone numbers of
each person who is a director and executive officer of MDS and the present
principal occupation or employment of each such person and the name, principal
business and address of any other corporation or organization in which such
person has held a material occupation, position, office or employment in the
past five years. All of the directors and executive officers have held their
present positions or other executive positions with MDS or one or more
subsidiaries or associated companies, or with the same or associated firms or
organizations, for the last five years, unless otherwise indicated. Each person
listed below is a citizen of Canada, unless otherwise indicated. Neither MDS nor
any person listed below has been convicted in a criminal proceeding or has been
a party to any judicial or administrative proceeding during the past five years
resulting in a judgement, decree or final order enjoining the person from future
violations of, or prohibiting activities subject to, U.S. federal or state
securities laws, or a finding of any violation of U.S. federal or state
securities laws.
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
NAME AND CURRENT BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------- --------------------------------------------------
Paul S. Anderson............................. Director, MDS and Director, Albany Molecular
Research, Inc. (drug discovery and development
100 International Blvd. company) (2003 to 2004); prior thereto, Vice
Toronto, ON President Research, Bristol-Myers Squibb Company
(416) 675-6777 (pharmaceutical company) (2001 to 2002), Vice
Citizen of the United States President Research, Dupont Pharmaceuticals Company
(pharmaceutical company) (1998 to 2001)
Clarence J. Chandran......................... Director, MDS Inc. and President, Business Process
100 International Blvd. Services, CGI Group Inc. (since November 2003) and
Toronto, ON Chairman of the board, India, CGI Group Inc.
(416) 675-6777 (since February 2004); prior thereto, Chief
Operating Officer of Nortel Networks Corp.
(communications technology and infrastructure
company) (May 2000 to May 2001)
Wendy K. Dobson.............................. Director, MDS, Director, TransCanada Pipelines
Limited (energy company) (since 1992), Director,
105 St. George Street The Toronto-Dominion Bank (Canadian chartered
Toronto, ON bank) (since 1991) and Professor, University of
(416) 978-7792 Toronto (since 1991)
William A. Etherington....................... Director, MDS and Director, IBM Corporation (since
October 2001); prior thereto, Senior Vice
199 Bay Street, Suite 4460 President, Sales, IBM Corporation (June 1998 to
Toronto, ON August 2001)
(416) 980-3300
John R. Evans................................ Director, MDS and Chairman of the board for
Torstar Corporation (newspaper and book publishing
One Yonge Street, 6th Floor company) (since 1995)
Toronto, ON
(416) 869-4015
Wilfred G. Lewitt............................ Chairman, MDS (since April 1996)
100 International Blvd.
Toronto, ON
(416) 675-6777
Robert W. Luba............................... Director, MDS and President, Luba Financial Inc.
(mid-market merchant banker) (since 1994)
77 King Street West, Suite 4545
Toronto, ON
(416) 214-0568
</Table>
L-1
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
NAME AND CURRENT BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------- --------------------------------------------------
John T. Mayberry............................. Director, MDS; prior thereto, Chairman and Chief
Executive Officer, Dofasco Inc. (steel
100 International Blvd. manufacturer) (May 2002 to May 2003), President
Toronto, ON and Chief Executive Officer, Dofasco Inc. (January
(416) 675-6777 1991 to May 2002)
Mary Mogford................................. Director, MDS, Director, Empire Company Limited
(grocery, real estate, theatres, investments)
100 International Blvd. (since September 2002), Director, Falconbridge
Toronto, ON Limited (metal producer) (since December 1995),
(416) 675-6777 Director, Potash Corporation of Saskatchewan Inc.
(potash producer) (since May 2001), Director,
Sears Canada Inc. (since April 1999), Director,
Sears Canada Bank (subsidiary of Sears Canada
Inc.) (since January 2004)
John A. Rogers............................... Director, President and Chief Executive Officer,
MDS (since March 1996)
100 International Blvd.
Toronto, ON
(416) 675-6777
Nelson M. Sims............................... Director, MDS and President and Chief Executive
Officer, Novavax, Inc. (biopharmaceutical company)
8320 Guilford Road, Suite C (since August 2003); prior thereto, executive of
Columbia, MD Eli Lilly and Company (pharmaceutical company)
(301) 854-3900 (April 1973 to June 2001)
Citizen of the United States and Canada
Robert W. Breckon............................ Executive Vice President, Strategy and Corporate
Development, MDS (since March 1999)
100 International Blvd.
Toronto, ON
Peter Brent.................................. Senior Vice President, General Counsel and
Corporate Secretary, MDS (since 2002); prior
100 International Blvd. thereto, Vice President, General Counsel and
Toronto, ON Corporate Secretary, MDS (1998 to 2002)
(416) 675-6777
Mary E. Federau.............................. Senior Vice President, Talent, MDS (since April
2000); prior thereto, Executive Vice President of
100 International Blvd. the Hospital for Sick Children
Toronto, ON
(416) 675-6777
James A.H. Garner............................ Executive Vice President and Chief Financial
Officer, MDS (since July 2003); prior thereto,
100 International Blvd. Senior Vice President, Finance and Chief Financial
Toronto, ON Officer, Draxis Health Inc. (radiopharmaceutical
(416) 675-6777 company) (September 1996 to June 2003)
John D. Gleason.............................. Senior Vice-President, Business Development, MDS
(since 1999)
100 International Blvd.
Toronto, ON
(416) 675-6777
</Table>
L-2
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
NAME AND CURRENT BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------- --------------------------------------------------
R. Ian Lennox................................ Group President and Chief Executive Officer
Pharmaceutical and Biotech Markets, MDS (since
100 International Blvd. September 2002); prior thereto, President and
Toronto, ON Chief Executive Officer, Drug Discovery and
(416) 675-6777 Development, MDS (April 2000 to September 2002),
President and Chief Executive Officer, Phoenix
International Life Sciences Inc. (a clinical
research organization) (October 1999 to April
2000), President and Chief Executive Officer, Drug
Royalty Corporation Inc. (a pharmaceutical royalty
interest acquisition company) (March 1997 to
October 1999)
Sharon M. Mathers............................ Vice President, Investor Relations, MDS (since
January 2001); prior thereto, Director, Investor
100 International Blvd. Relations, MDS Inc. (February 1998 to January
Toronto, ON 2001)
(416) 675-6777
John A. Morrison............................. Group President and Chief Executive Officer,
Healthcare Provider Markets, MDS (since September
100 International Blvd. 2002); prior thereto, President and Chief
Toronto, ON Executive Officer, MDS Nordion (radioisotopes and
(416) 675-6777 radiation technology division of MDS) (March 1992
to September 2002)
Michael W.E. Nethercott...................... Vice President, Business Development, MDS; prior
thereto, Global Marketing Director, Deloitte
100 International Blvd. Consulting (Belgium and Canada) (June 1996 to May
Toronto, ON 2003)
(416) 675-6777
James M. Reid................................ Executive Vice President, Organization Dynamics,
MDS (since 1997)
100 International Blvd.
Toronto, ON
(416) 675-6777
David F. Poirier............................. President, Enterprise Services and Chief
Information Officer, MDS (since December 2003);
100 International Blvd. prior thereto, Executive Vice President and Chief
Toronto, ON Information Officer, Hudson's Bay Company (retail
(416) 675-6777 company) (1998 to 2003)
Edward Rygiel................................ Executive Vice-President, MDS (since 1999); prior
thereto, Executive Chairman, MDS Capital Corp. (a
100 International Blvd. health related venture capital firm) (2003 to
Toronto, ON 2004), Chairman and Chief Executive Officer, MDS
(416) 675-6777 Capital Corp. (1999 to 2003)
Alan D. Torrie............................... Executive Vice President Global Markets and
Technology, MDS (since 1987)
100 International Blvd.
Toronto, ON
(416) 675-6777
Peter D. Winkley............................. Vice President, Finance, MDS (since January 1999);
prior thereto, Corporate Controller, MDS (January
100 International Blvd. 1997 to December 1998)
Toronto, ON
(416) 675-6777
</Table>
L-3
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
NAME AND CURRENT BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------- --------------------------------------------------
Ron Yamada................................... Executive Vice-President, MDS Inc.
100 International Blvd.
Toronto, ON
(416) 675-6777
</Table>
DIRECTORS AND OFFICERS OF MDS SUBCO
Set forth below are the names of each person who is a director and
executive officer of MDS Subco and the present principal occupation or
employment of each such person and the name, principal business and address of
any other corporation or organization in which such a person has held a material
occupation, position, officer or employment in the past five years. All of the
directors and executive officers have held their present positions or other
executive positions with MDS Subco or one or more subsidiaries or associated
companies, or with the same or associated firms or organizations, for the last
five years, unless otherwise indicated. The current business address and
telephone number for each of the directors and executive officer listed below is
that of MDS Subco: 100 International Blvd, Toronto, Ontario, Canada, (416)
675-6777. MDS Subco was incorporated under the laws of Canada and is a
laboratory services company. Each person listed below is a citizen of Canada,
unless otherwise indicated. Neither MDS Subco nor any person listed below has
been convicted in a criminal proceeding or has been a party to any judicial or
administrative proceeding during the past five years resulting in a judgement,
decree or final order enjoining the person from future violations of, or
prohibiting activities subject to, U.S. federal or state securities laws, or a
finding of any violation of U.S. federal or state securities laws.
<Table>
<Caption>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT:
NAME AND CURRENT BUSINESS ADDRESS MATERIAL POSITIONS HELD DURING THE PAST FIVE YEARS
- --------------------------------- --------------------------------------------------
Brian L. Sheridan............................ Director, MDS Subco and Senior Vice President,
Medical Affairs, MDS (since September 2003); prior
thereto, Vice President, Medical Affairs, MDS
Diagnostic Services, MDS (September 2000 to
September 2003), Senior Medical Consultant, MDS
Diagnostic Services, MDS (June 1999 to September
2000) and Medical Director, MDS Ontario
Laboratories, MDS (July 1997 to June 1999)
Bradley G. Legge............................. Director, MDS Subco and Vice President Finance,
MDS (since June 2002); prior thereto, Director of
Finance, Canadian Diagnostics, MDS (May 2001 to
June 2002), Director of Finance, Ontario
Diagnostics, MDS (October 1997 to May 2001)
Hans Thunem.................................. Director, MDS Subco and Senior Vice President,
Operations, MDS (since November 2003); prior
thereto, Vice President, Supply Chain, MDS (March
2002 to November 2003) and Vice President NA
Operations, Nortel Networks Corp. (communications
technology and infrastructure company) (May 1995
to January 2001)
Anne Louis Aboud............................. Vice President and General Manager, MDS Subco and
Vice President and General Manager, Eastern
Canada, MDS (since November 11, 2003); prior
thereto Senior Vice President, TD Waterhouse (a
discount broker) (May 1999 to February 2002)
</Table>
L-4
ANNEX M -- AMENDED AND RESTATED LABCO BY-LAWS
BY-LAW NUMBER 1
A BY-LAW RELATING TO THE BUSINESS AND AFFAIRS OF
LPBP INC.
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS
In this by-law:
"ACT" means the Business Corporations Act (Ontario) and the regulations
enacted pursuant to it and any statute and regulations that may be
substituted for them, as amended from time to time;
"ARTICLES" means the articles, as that term is defined in the Act, of the
Corporation;
"AUDITOR" means the auditor of the Corporation;
"BOARD" means the board of directors of the Corporation;
"BY-LAW" means a by-law of the Corporation;
"CORPORATION" means the corporation incorporated on July 11, 1985 under the
name "Hemosol Inc." and subsequently renamed "LPBP Inc.";
"DIRECTOR" means a director of the Corporation;
"OFFICER" means an officer of the Corporation, and reference to any
specific officer is to the individual holding that office of the
Corporation;
"PERSON" means an individual, body corporate, partnership, joint venture,
trust, unincorporated organization, association, the Crown or any agency or
instrumentality thereof, or any entity recognized by law;
"PROXYHOLDER" means an individual holding a valid proxy for a shareholder;
"RESIDENT CANADIAN" has the meaning ascribed to that phrase in the Act;
"SHAREHOLDER" means a shareholder of the Corporation;
"TELEPHONIC OR ELECTRONIC MEANS" means telephone calls or messages,
facsimile messages, electronic mail, transmission of data or information
through automated touch-tone telephone systems, transmission of data or
information through computer networks, any other similar means or any other
means prescribed by the Act; and
"VOTING PERSON" means, in respect of a meeting of shareholders, an
individual who is either a shareholder entitled to vote at that meeting, a
duly authorized representative of a shareholder entitled to vote at the
meeting or a proxyholder entitled to vote at that meeting.
1.2 NUMBER, GENDER AND HEADINGS
In this by-law, words in the singular include the plural and vice-versa and
words in one gender include all genders. The insertion of headings in this
by-law and its division into articles, sections and other subdivisions are for
convenience of reference only, and shall not affect the interpretation of this
by-law.
1.3 BY-LAW SUBORDINATE TO OTHER DOCUMENTS
This by-law is subordinate to, and should be read in conjunction with, the
Act and the articles of the Corporation.
M-1
1.4 COMPUTATION OF TIME
The computation of time and any period of days shall be determined in
accordance with the Act.
ARTICLE 2
DIRECTORS
2.1 NOTICE OF MEETING
Any director or the president may call a meeting of the board by giving
notice stating the date, time and place of the meeting to each of the directors
other than the director giving that notice. Notices sent by delivery or by
telephonic or electronic means shall be sent no less than 48 hours before the
time of the meeting. Notices sent by mail shall be sent no less than five days
before the day of the meeting.
The board may appoint, by resolution, dates, time and places for meetings
of the board. A copy of any such resolution shall be sent to each director
forthwith after being passed, but no other notice is required for any such
meeting.
2.2 MEETINGS WITHOUT NOTICE
A meeting of the board may be held without notice immediately following the
first or any annual meeting of Place of Meeting
2.3 PLACE OF MEETING
A meeting of the board may be held at any place within or outside Ontario,
and no such meeting need be held at a place within Canada.
2.4 NO NOTICE TO NEWLY APPOINTED DIRECTOR
An individual need not be given notice of the meeting at which that
individual is appointed by the other directors to fill a vacancy on the board,
if that individual is present at that meeting.
2.5 QUORUM FOR BOARD MEETINGS
If there are one or two directors, all of the directors constitute a quorum
at a meeting of the board. If there are more than 2 directors, 40% of the number
of directors shall constitute a quorum at a meeting of the board. In this
section, the "number of directors" is either:
(a) the number of directors specified in the articles; or
(b) if a minimum and maximum number of directors is provided for in the
articles, the number determined from time to time by special
resolution or, if the special resolution empowers the directors to
determine the number, by resolution of the directors, or if no such
resolution has been passed, the number of directors named in the
articles.
2.6 CHAIRMAN OF BOARD MEETINGS
The chairman of a meeting of the board must be a director present at the
meeting who consents to preside as chairman. The first-mentioned of the chairman
of the board or the president who so qualifies shall preside as chairman of the
meeting. If none of them is so qualified, the directors present at the meeting
shall choose a director to preside as chairman of the meeting.
2.7 VOTES AT BOARD MEETINGS
Each director present at a meeting of the board shall have one vote on each
motion arising. Motions arising at meetings of the board shall be decided by a
majority vote. The chairman of the meeting shall not have a second or casting
vote.
2.8 OFFICERS
Each officer shall hold office during the pleasure of the board. Any
officer may, however, resign at any time by giving notice to the Corporation.
M-2
ARTICLE 3
MEETINGS OF SHAREHOLDERS
3.1 NOTICE OF SHAREHOLDERS' MEETINGS
The board may call a meeting of shareholders by causing notice of the date,
time and place of the meeting to be sent to each shareholder entitled to vote at
the meeting, each director and the auditor. Such notice shall be sent no less
than 21 days and no more than 50 days before the meeting, if the Corporation is
an offering corporation (as defined in the Act), or no less than 10 days and no
more than 50 days before the meeting if the Corporation is not an offering
corporation.
3.2 QUORUM AT MEETINGS OF SHAREHOLDERS
If the Corporation has only one shareholder entitled to vote at a meeting
of shareholders, that shareholder constitutes a quorum. Otherwise, any two
voting persons present shall constitute a quorum, but only to appoint a chairman
and adjourn the meeting. For all other purposes, a quorum consists of at least
two voting persons present and authorized to cast in the aggregate not less than
20% of the total number of votes attaching to all shares carrying the right to
vote at that meeting.
3.3 CHAIRMAN'S VOTE
The chairman of any meeting of shareholders shall not have a second or
casting vote.
3.4 VOTING
Unless the chairman of a meeting of shareholders directs a ballot, or a
voting person demands one, each motion shall be voted upon by a show of hands.
Each voting person has one vote in a vote by show of hands. A ballot may be
directed or demanded either before or after a vote by show of hands. If a ballot
is taken, a prior vote by show of hands has no effect.
3.5 SCRUTINEERS
The chairman of a meeting of shareholders may appoint for that meeting one
or more scrutineers, who need not be voting persons.
3.6 WHO MAY ATTEND SHAREHOLDERS' MEETING
The only persons entitled to attend a meeting of shareholders are voting
persons, the directors, the auditor and, if any, the chairman, the managing
director and the President, as well as others permitted by the chairman of the
meeting.
3.7 MEETING BY TELEPHONIC OR ELECTRONIC MEANS
A meeting of the shareholders may be held by telephonic or electronic means
and a shareholder who, through those means, votes at the meeting or establishes
a communications link to the meeting shall be deemed for the purposes of the Act
to be present at the meeting.
ARTICLE 4
SECURITY CERTIFICATES, PAYMENTS
4.1 CERTIFICATES
Security certificates shall be in such form as the board may approve or the
Corporation adopt. The president or the board may order the cancellation of any
security certificate that has become defaced and the issuance of a replacement
certificate for it when the defaced certificate is delivered to the Corporation
or to a transfer agent or branch transfer agent of the Corporation.
4.2 CHEQUES AND OTHER FORMS OF PAYMENT
Any amount payable in cash to shareholders (including dividends payable in
cash) may be paid by (i) cheque drawn on any of the Corporation's bankers to the
order of each registered holder of shares of the class or series in respect of
which such amount is to be paid, or (ii) in such other manner as is required by
the Corporation's bankers or as required by law. Cheques may be sent by delivery
or first class mail to such registered holder at that holder's
M-3
address appearing on the register of shareholders, unless that holder otherwise
directs in writing. By sending a cheque or making payment in such other manner,
in each case as provided in this by-law, in the amount of the dividend less any
tax that the Corporation is required to withhold, the Corporation discharges its
liability to pay the amount of that dividend, unless, in the case of payment by
cheque, the cheque is not paid on due presentation.
4.3 CHEQUES TO JOINT SHAREHOLDERS
Cheques payable to joint shareholders shall be made payable to the order of
all such joint shareholders unless such joint shareholders direct otherwise.
Such cheques may be sent to the joint shareholders at the address appearing on
the register of shareholders in respect of that joint holding, to the first
address so appearing if there is more than one, or to such other address as
those joint shareholders direct in writing.
4.4 NON-RECEIPT OF CHEQUES
The Corporation shall issue a replacement cheque in the same amount to any
person who does not receive a cheque sent as provided in this by-law, if that
person has satisfied the conditions regarding indemnity, evidence of non-receipt
and title set by the board from time to time, either generally or for that
particular case.
4.5 CURRENCY OF DIVIDENDS
Dividends or other distributions payable in cash may be paid to some
shareholders in Canadian currency and to other shareholders in equivalent
amounts of a currency or currencies other than Canadian currency. The board may
declare dividends or other distributions in any currency or in alternative
currencies and make such provisions as it deems advisable for the payment of
such dividends or other distributions.
ARTICLE 5
SIGNATORIES, INFORMATION
5.1 SIGNATORIES
Except for documents executed in the usual and ordinary course of the
Corporation's business, which may be signed by any officer or employee of the
Corporation acting within the scope of his or her authority, the following are
the only persons authorized to sign any document on behalf of the Corporation:
(a) any individual appointed by resolution of the board to sign the
specific document, that type of document or documents generally on
behalf of the Corporation; or
(b) any two individuals, one of whom shall be the President and the other
of whom shall be any director or any officer appointed to office by
the board.
Any document so signed may, but need not, have the corporate seal of the
Corporation applied, if there is one.
5.2 FACSIMILE SIGNATURES
The signature of any individual authorized to sign on behalf of the
Corporation may, if specifically authorized by resolution of the board, be
written, printed, stamped, engraved, lithographed or otherwise mechanically
reproduced. Anything so signed shall be as valid as if it had been signed
manually, even if that individual has ceased to hold office when anything so
signed is issued or delivered, until revoked by resolution of the board.
5.3 RESTRICTION ON INFORMATION DISCLOSED
Except as required by the Act or authorized by the board, no shareholder is
entitled by virtue of being a shareholder to disclosure of any information,
document or records respecting the Corporation or its business.
ARTICLE 6
PROTECTION AND INDEMNITY
6.1 TRANSACTIONS WITH THE CORPORATION
No director or officer shall be disqualified, by virtue of being a
director, or by holding any other office of, or place of profit under, the
Corporation or any body corporate in which the Corporation is a shareholder or
is otherwise interested, from entering into, or from being concerned or
interested in any manner in, any contract, transaction or arrangement made, or
proposed to be made, with the Corporation or any body corporate in which the
M-4
Corporation is interested and no such contract, transaction or arrangement shall
be void or voidable for any such reason. No director or officer shall be liable
to account to the Corporation for any profit arising from any such office or
place of profit or realized in respect of any such contract, transaction or
arrangement. Except as required by the Act, no director or officer must make any
declaration or disclosure of interest or, in the case of a director, refrain
from voting in respect of any such contract, transaction or arrangement.
6.2 LIMITATION OF LIABILITY
Subject to the Act, no director or officer shall be liable for:
(a) the acts, receipts, neglects or defaults of any other person;
(b) joining in any receipt or act for conformity;
(c) any loss, damage or expense to the Corporation arising from the
insufficiency or deficiency of title to any property acquired by or on
behalf of the Corporation;
(d) the insufficiency or deficiency of any security in or upon which any
moneys of the Corporation are invested;
(e) any loss, damage or expense arising from the bankruptcy, insolvency,
act or omission of any person with whom any monies, securities or
other property of the Corporation are lodged or deposited;
(f) any loss, damage or expense occasioned by any error of judgment or
oversight; or
(g) any other loss, damage or expense related to the performance or
non-performance of the duties of that individual's office.
6.3 CONTRACTS ON BEHALF OF THE CORPORATION
Subject to the Act, any contract entered into, or action taken or omitted,
by or on behalf of the Corporation shall, if duly approved by a resolution of
the shareholders, be deemed for all purposes to have had the prior authorization
of the shareholders.
6.4 INDEMNITY OF DIRECTORS AND OFFICERS
As required or permitted by the Act, the Corporation shall indemnify each
Indemnified Person (as defined in this section) against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a judgment,
which that Indemnified Person reasonably incurs in respect of any civil,
criminal or administrative action or proceeding to which that Indemnified Person
is made a party by reason of being or having been a director or officer of the
Corporation or of a body corporate of which the Corporation is or was a
shareholder or creditor if:
(a) the Indemnified Person acted honestly and in good faith with a view to
the best interests of the Corporation; and
(b) in the case of a criminal or administrative action or proceeding that
is enforced by a monetary penalty, the Indemnified Person had
reasonable grounds for believing that the conduct was lawful.
"INDEMNIFIED PERSON" means
(i) each director and former director of the Corporation;
(ii) each officer and former officer of the Corporation;
(iii) each individual who acts or acted at the Corporation's request as
a director or officer of a body corporate of which the Corporation
is or was a shareholder or creditor; and
(iv) the respective heirs and legal representatives of each of the
persons designated in the preceding paragraphs (a) through (c).
6.5 INDEMNITIES NOT LIMITING
The provisions of this Article 6 shall be in addition to and not in
substitution for any rights, immunities and protections to which an Indemnified
Person is otherwise entitled.
M-5
ARTICLE 7
NOTICES
7.1 PROCEDURE FOR SENDING NOTICES
Notice shall be deemed to have been sufficiently sent if sent in writing to
the address of the addressee on the books of the Corporation and delivered in
person, sent by prepaid first class mail or sent by any telephonic or electronic
means of sending messages, including telex or facsimile transmission, which
produces a paper record. Notice shall not be sent by mail if there is any
general interruption of postal services in the municipality in which or to which
it is mailed. Each notice so sent shall be deemed to have been received on the
day it was delivered or sent by telephonic or electronic means or on the fifth
day after it was mailed.
7.2 NOTICES TO SUCCESSORS IN TITLE
Notice to a shareholder is sufficient notice to each successor in title to
that shareholder until the name and address of that successor have been entered
on the Corporation's share register.
7.3 NOTICE TO JOINT SHAREHOLDERS
Notice to one joint shareholder is sufficient notice to all of them. Such
notice shall be addressed to all such joint shareholders and sent to the address
for them on the Corporation's register of shareholders, or to the first such
address if there is more than one.
7.4 FACSIMILE SIGNATURES ON NOTICES
The signature on any notice or other communication or document to be sent
by the Corporation may be written, printed, stamped, engraved, lithographed or
otherwise mechanically reproduced.
7.5 OMISSION OF NOTICE DOES NOT INVALIDATE ACTIONS
All actions taken at a meeting in respect of which a notice has been sent
shall be valid even if:
(a) by accident, notice was not sent to any person;
(b) notice was not received by any person; or
(c) there was an error in a notice that did not affect the substance of
that notice.
7.6 WAIVER OF NOTICE
Any person entitled to notice under the Act, the articles or the by-laws
may waive that notice. Waiver, either before or after the event referred to in
the notice, shall cure any default in sending that notice.
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ARTICLE 8
REPEAL OF FORMER BY-LAWS
8.1 FORMER BY-LAWS MAY BE REPEALED
The board may repeal one or more by-laws by passing a by-law that contains
provisions to that effect.
8.2 REPEAL OF BY-LAWS
By-law(s) 1 and 2 of the Corporation are repealed.
8.3 EFFECT OF REPEAL OF BY-LAWS
The repeal of any by-law in whole or part shall not in any way affect the
validity of any act done or right, privilege, obligation or liability acquired
or incurred thereunder prior to such repeal. All directors, officers and other
persons acting under any by-law repealed in whole or part shall continue to act
as if elected or appointed under the provisions of this by-law.
MADE by the board on the -- day of -- , 2004.
<Table>
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President Secretary
</Table>
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