<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1997
REGISTRATION NO. 333-33781
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
SALIX HOLDINGS, LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------
BRITISH VIRGIN ISLANDS 2834 94-3267443
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION) -----------
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(650) 856-1550
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------
DAVID BOYLE
VICE PRESIDENT, FINANCE & ADMINISTRATION,
AND CHIEF FINANCIAL OFFICER
SALIX HOLDINGS, LTD.
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(650) 856-1550
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE OF PROCESS)
-----------
COPIES TO:
DOUGLAS H. COLLOM, ESQ. ROBERT M. CHILSTROM, ESQ.
ROBERT F. KORNEGAY, ESQ. CHRISTOPHER W. MORGAN, ESQ.
ROSEMARY G. REILLY, ESQ. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
WILSON SONSINI GOODRICH & ROSATI P.O. BOX 189, ROYAL BANK PLAZA
PROFESSIONAL CORPORATION NORTH TOWER, SUITE 1820
650 PAGE MILL ROAD TORONTO, ONTARIO M5J 2J4
PALO ALTO, CALIFORNIA 94304 (416) 777-4700
(650) 493-9300
-----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a Prospectus relating to a public
offering in the United States (the "U.S. Offering") of the Common Shares, no
par value (the "Common Shares"), of Salix Holdings, Ltd., together with
alternate prospectus pages relating to a concurrent offering of the Common
Shares in Canada (the "Canadian Offering"). The complete Prospectus for the
U.S. Offering follows immediately after this explanatory note. After such
Prospectus are the following alternate prospectus pages for the Canadian
Offering: a front outside cover page, a front inside cover page and the pages
containing the captions "Certificate of the Company" and "Certificate of the
Underwriters". All other pages of the Prospectus for the U.S. Offering are to
be used for both the U.S. Offering and the Canadian Offering.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE OR JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1997
3,000,000 Common Shares
[LOGO OF SALIX HOLDINGS, LTD.]
-------------
All of the Common Shares offered hereby are being sold by Salix Holdings,
Ltd. ("Salix" or the "Company"). The Company's Common Shares are traded on The
Toronto Stock Exchange. Prior to this offering, there was no public market for
the Company's Common Shares in the United States, and following this offering
the Common Shares will be traded only in Canada. See "Description of Share
Capital". On August 13, 1997, the closing price of the Company's Common Shares
as reported on The Toronto Stock Exchange was Cdn. $8.50 per Common Share. See
"Price Range of Common Shares". On August 13, 1997, The Bank of Canada noon
rate of exchange for United States dollars into Canadian dollars was
Cdn. $1.3942 = U.S. $1.00.
The 3,000,000 Common Shares offered hereby are being offered outside the
United States by the Canadian Underwriters and in the United States by certain
U.S. affiliates of the Canadian Underwriters. See "Plan of Distribution".
The Company has only a limited history of operations and a history of
operating losses. During the period from its inception to June 30, 1997, the
Company incurred cumulative losses of approximately $11.1 million. The Company
currently expects operating losses to continue at least through 1999 and to
increase from current levels prior to 1999.
--------
THE COMMON SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 9.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC (/1/) COMMISSIONS (/2/) COMPANY (/3/)
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<S> <C> <C> <C>
Per Share..................... Cdn. $ Cdn. $ Cdn. $
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Total (/4/)................... Cdn. $ Cdn. $ Cdn. $
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</TABLE>
(1) Purchasers will be required to pay for the Common Shares in Canadian
dollars. The Underwriters have arranged for the conversion of U.S. dollars
into Canadian dollars to enable U.S. purchasers to pay for the Common
Shares. All costs of exchange will be borne by the purchasers of the Common
Shares. See "Plan of Distribution".
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the United States Securities Act
of 1933, as amended, and applicable Canadian securities laws. See "Plan of
Distribution".
(3) Before deducting expenses payable by the Company, estimated at Cdn.
$1,219,925 (U.S. $875,000).
(4) The Company has granted to the Underwriters a 60-day option to purchase up
to an additional 450,000 Common Shares, solely to cover over-allotments, if
any. See "Plan of Distribution". If such option is exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be Cdn. $ , Cdn. $ and Cdn. $ , respectively.
--------
The Common Shares are offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any
order in whole or in part. It is expected that delivery of such shares will be
made through the offices of Levesque Beaubien Geoffrion Inc., Montreal, Quebec
on or about , 1997.
NBC Levesque International Ltd. Yorkton Capital Inc.
Marleau, Lemire Securities Inc. Midland Walwyn Capital Corporation
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[ARTWORK: PHOTOGRAPHIC DEPICTION OF THE MANUFACTURE OF BALSALAZIDE CAPSULES AND
PHOTOGRAPHS OF FINISHED BALSALAZIDE CAPSULES].
In July 1997, Salix received
authorization to market its first product,
Colazide, for treatment of acute ulcerative
colitis from the United Kingdom Medicines
Control Agency. The Company submitted a New
Drug Application to the United States Food
and Drug Administration in June 1997 for
the same indication. The Company has in-
licensed a second product, rifaximin, and
intends to pursue regulatory approvals for
the drug in the treatment of two initial
indications, hepatic encephalopathy and
antibiotic associated colitis. The Company
believes that a New Drug Application will
not be filed for rifaximin prior to mid-
1998 and that Food and Drug Administration
approval for rifaximin will not be obtained
for at least one year after filing, if at
all.
Colazide is currently being manufactured
in preparation for the scheduled October
1997 United Kingdom product launch.
Colazide has been approved for marketing in
the United Kingdom only and there can be no
assurance that it will be approved for use
in the United States or any other
jurisdiction in which the Company seeks
approval.
Salix, Salix Pharmaceuticals, Glycyx Pharmaceuticals, and Salix Holdings are
trade names of the Company. Colazide is a trademark of Biorex Laboratories
Limited. This Prospectus also contains trademarks and trade names of other
companies.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING,
MAY BID FOR, AND PURCHASE, THE COMMON SHARES IN THE OPEN MARKET AND MAY IMPOSE
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION".
<PAGE>
No dealer, sales representative or any other person has been authorized to
give any information or to make any representation in connection with this
offering other than those contained in this Prospectus, and, if given or made,
such information or representations must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell, or a solicitation of an offer to buy, any
securities other than the registered securities to which it relates or an
offer to, or solicitation of, any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as
of any time subsequent to the date hereof.
Until , 1997 (90 days after the date of this Prospectus), all dealers
effecting transactions in the Common Shares, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Exchange Rates........................................................... 4
Eligibility for Investment............................................... 4
Summary.................................................................. 5
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 20
Price Range of Common Shares............................................. 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 29
Management............................................................... 48
Principal Shareholders................................................... 58
Description of Share Capital............................................. 59
Prior Sales of Securities................................................ 60
Comparison of Canadian, United States and British Virgin Islands
Corporate Laws.......................................................... 61
Certain Tax Considerations............................................... 63
Shares Eligible for Future Sale.......................................... 67
Plan of Distribution..................................................... 69
Legal Matters............................................................ 71
Auditors................................................................. 71
Transfer Agent........................................................... 71
Material Contracts....................................................... 72
Canadian Purchasers' Statutory Rights.................................... 73
Additional Information................................................... 73
Glossary................................................................. 74
Index to Consolidated Financial Statements............................... F-1
</TABLE>
------------
The Company intends to furnish its shareholders with annual reports
containing audited financial statements examined by an independent accounting
firm and quarterly reports for the first three quarters of each year
containing interim unaudited consolidated financial information. Upon
completion of the offering contemplated hereby, the Company will be subject to
the informational requirements of the United States Securities Exchange Act of
1934, and in accordance therewith, will be filing reports and other
information with the United States Securities and Exchange Commission. The
Company is also subject to the informational requirements of The Toronto Stock
Exchange and applicable Canadian securities legislation.
------------
3
<PAGE>
EXCHANGE RATES
IN THIS PROSPECTUS, UNLESS OTHERWISE SPECIFIED OR THE CONTEXT OTHERWISE
REQUIRES, ALL DOLLAR AMOUNTS ARE EXPRESSED IN UNITED STATES DOLLARS. The
average exchange rate for the six months ended June 30, 1997 and 1996 and the
years ended December 31, 1996, 1995, 1994, 1993 and 1992 and the exchange rate
at the end of each such period for the conversion of United States dollars
into Canadian dollars based on the Bank of Canada noon rate of exchange for
United States dollars were as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, ----------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
End of period................ 1.3811 1.3651 1.3696 1.3652 1.4028 1.3240 1.2711
Period average............... 1.3724 1.3668 1.3636 1.3726 1.3659 1.2898 1.2083
</TABLE>
On August 13, 1997, the Bank of Canada noon rate of exchange for United
States dollars into Canadian dollars was Cdn. $1.3942 = U.S. $1.00. Unless
otherwise noted, all exchange rate conversions within this Prospectus assume
an exchange rate of Cdn. $1.3942 = U.S. $1.00.
ELIGIBILITY FOR INVESTMENT
Eligibility of the Common Shares offered hereby for investment by purchasers
to whom any of the following statutes apply is, in certain cases, governed by
criteria which such purchasers are required to establish as policies or
guidelines pursuant to the applicable statute (and, where applicable, the
regulations thereunder) and is subject to the prudent investment standards and
general investment provisions and restrictions provided therein:
Insurance Companies Act (Canada) An Act respecting insurance (Quebec)
Pension Benefits Standards Act, 1985 (for insurers as defined therein
(Canada) incorporated under the laws of the
Trust and Loan Companies Act (Canada) province of Quebec other than a
Pension Benefits Act (Ontario) mutual association or guarantee
Financial Institutions Act fund)
(British Columbia) An Act respecting trust companies
Pension Benefits Standards Act and savings companies (Quebec) (for
(British Columbia) savings companies investing their
Supplemental Pension Plans Act (Quebec) own funds, and by trust companies
investing their own funds and
deposits received by them)
The Common Shares will be qualified investments under the Income Tax Act
(Canada) (the "Canadian Act") for trusts governed by registered retirement
savings plans, registered retirement income funds and deferred profit sharing
plans.
The Common Shares will be foreign property for the purposes of the foreign
property limitations under the Canadian Act. Part XI of the Canadian Act
requires that certain tax payers, including registered retirement savings
plans, registered retirement income funds and deferred profit sharing plans,
restrict their investments in foreign property within the limits contained in
the Canadian Act in order to avoid a penalty tax. The foreign property limit
is currently 20% of the cost amount of all property held by the taxpayer.
FOREIGN CORPORATION
The Company is an International Business Company incorporated under the laws
of the British Virgin Islands. Accordingly, principles of law relating to such
matters as the validity of corporate procedures, the fiduciary duties of
management and the rights of the Company's shareholders and other stakeholders
may differ from those that would apply if the Company were incorporated in a
jurisdiction within the United States or Canada. The shareholders and other
stakeholders of Salix may have more difficulty in protecting their interests
in the face of actions by the Board of Directors of the Company or a majority
shareholder than they might have with respect to a corporation incorporated in
a jurisdiction in the United States or Canada.
4
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Prospective investors should consider carefully the
information discussed under "Risk Factors" and elsewhere in this Prospectus.
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
The "as adjusted" and other proforma financial information contained in this
Prospectus under "Summary", "Dilution", "Capitalization" and "Use of Proceeds"
assumes the completion of the offering of the Common Shares made hereby at an
assumed public offering price of Cdn. $8.50 per Common Share. This assumed
price represents the closing price of the Company's Common Shares as reported
on The Toronto Stock Exchange on August 13, 1997, and is not indicative of the
actual offering price of the Common Shares to be determined by the Company and
the Underwriters.
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "$" OR "DOLLARS" REFER TO
UNITED STATES DOLLARS. ALL REFERENCES TO "CDN. $" REFER TO CANADIAN DOLLARS.
THE COMPANY
Salix Holdings, Ltd. ("Salix" or the "Company") identifies and in-licenses
gastrointestinal products that have near-term commercial potential and applies
its product development expertise to accelerate the commercialization of these
products. The Company's business strategy is to select and in-license
gastrointestinal products that have the potential for rapid regulatory
approval. By in-licensing drugs with late-stage clinical data and developing
these drugs for diseases that are in need of new pharmaceutical treatments, the
Company believes that it can significantly reduce the risk, time and investment
normally associated with the development and commercialization of
pharmaceutical products.
The Company's first product, Colazide, recently was approved for marketing in
the United Kingdom for the treatment of acute ulcerative colitis. The Company
currently expects that commercial launch of Colazide in the United Kingdom will
occur in October 1997 and, subject to regulatory approvals, that Colazide will
become commercially available in other countries in Europe in 1998. In
addition, the Company's New Drug Application ("NDA") for Colazide for the same
indication was recently accepted for filing by the United States Food and Drug
Administration ("FDA").
The Company has also in-licensed a second product, rifaximin, and intends to
pursue regulatory approvals for the drug in the treatment of two initial
indications, hepatic encephalopathy and antibiotic associated colitis. The
Company presently expects to submit an application to the FDA in the fourth
quarter of 1997 seeking Orphan Drug Status for rifaximin in the treatment of
hepatic encephalopathy. If the Company's application is approved, rifaximin
could receive priority review from the FDA following completion of clinical
trials for the drug and filing of an NDA for marketing approval. It is not
currently expected that the Company will be in a position to file an NDA for
rifaximin prior to mid-1998.
In the course of its transition to a commercial stage company, the Company
has leveraged its resources by establishing strategic alliances with companies
that have significant resources in clinical monitoring and manufacturing. In
anticipation of the commercial release of Colazide in the United
5
<PAGE>
Kingdom in October 1997, the Company has entered into manufacturing
arrangements with Courtaulds Chemicals (Holdings) Limited and Anabolic, Inc.,
each of which is a commercially established pharmaceutical manufacturer.
Colazide will be distributed in all markets except certain countries in
southern Europe and Asia by Astra AB ("Astra"), a Swedish international
pharmaceutical company, under a distribution agreement that provides Astra with
exclusive distribution rights, and in Italy, Spain, Portugal, and Greece by a
division of Menarini Pharmaceutical Industries s.r.l. ("Menarini"), an Italian
manufacturer and distributor of pharmaceutical products. The Company's
distribution arrangements with Astra and Menarini have provided the Company
with funding necessary to complete the late-stage development of Colazide, in-
license other gastrointestinal products and help establish the Company as a
viable gastrointestinal pharmaceutical company.
The Company expects to market and sell rifaximin and other future products
in-licensed and commercialized by the Company through a small, specialized
direct sales force to be established by Salix. The Company believes that a
direct sales model will reflect higher operating margins than the distribution
partner model that the Company will use in connection with sales of Colazide.
The Company was incorporated in the British Virgin Islands in December 1993.
Prior to December 1993, the business of the Company was conducted by Salix
Pharmaceuticals, Inc., a California corporation ("Salix Pharmaceuticals"),
which was incorporated in California in 1989, and Glycyx Pharmaceuticals, Ltd.,
a Bermuda corporation ("Glycyx"), each of which is now a subsidiary of Salix
Holdings, Ltd. Unless the context otherwise requires, references in this
Prospectus to "Salix" and the "Company" refer to Salix Holdings, Ltd., a
corporation organized under the laws of the British Virgin Islands, and its
wholly owned subsidiaries, Salix Pharmaceuticals and Glycyx. The Company's
executive offices are located at 3600 West Bayshore Road, Suite 205, Palo Alto,
California 94303, and its telephone number at that address is (650) 856-1550.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered...... 3,000,000 Common Shares of the Company
Common Shares
Outstanding after the
Offering............... 10,118,173 Common Shares(/1/)
Toronto Stock Exchange
Symbol................. SLX(/2/)
Use of Proceeds......... The net proceeds to the Company from the sale of the 3,000,000
Common Shares offered hereby are estimated to be approximately
Cdn. $22,622,575 (approximately Cdn. $26,198,950 if the
Underwriters' over-allotment option is exercised in full) at an
assumed public offering price of Cdn. $8.50 per Common Share,
which is not indicative of the actual offering price, and after
deducting estimated underwriting discounts and commissions and
offering expenses payable by the Company.
Of the offering proceeds, the Company expects to apply
approximately Cdn. $4,000,000 (U.S. $2,869,029) toward the
commercialization of Colazide in the United Kingdom and
obtaining regulatory approval in the United States,
approximately Cdn. $15,622,575 (U.S. $11,205,404) toward the
Company's other product development and clinical programs, and
approximately Cdn. $3,000,000 (U.S. $2,151,772) for other
working capital and general corporate purposes. The Company's
allocation of offering proceeds to other product development and
clinical programs will be increased by the amount of any net
proceeds resulting from the exercise of the Underwriters' over-
allotment option. There can be no assurance that the actual
allocation of the offering proceeds will not differ materially
from their currently anticipated use. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations".
</TABLE>
- --------
(1) Based on Common Shares outstanding as of June 30, 1997. Excludes (i)
713,500 Common Shares issuable upon exercise of options outstanding as of
June 30, 1997 under the Company's 1994 Stock Plan (the "1994 Plan") and the
1996 Stock Option Plan (the "1996 Plan" and together with the 1994 Plan,
the "Stock Plans") at a weighted average exercise price of $3.72 per Common
Share, (ii) 303,362 Common Shares reserved for issuance under future option
grants as of June 30, 1997 under the Stock Plans, and (iii) 602,331 Common
Shares issuable upon exercise of outstanding warrants as of June 30, 1997
at an exercise price of $3.00 per Common Share. See "Management--Stock
Plans", "Description of Share Capital" and Notes 8 and 10 of Notes to
Consolidated Financial Statements.
(2) The Company's Common Shares currently trade on The Toronto Stock Exchange
under the symbol "SLX.s" and carry a legend reflecting the Company's
reliance, in connection with its initial public offering in Canada in May
1996, on the exemption from the registration requirements of the United
States Securities Act of 1933, as amended (the "U.S. Securities Act"), set
forth in Regulation S thereunder. It is the Company's current intention to
authorize the removal on May 28, 1998 of the Regulation S legend from all
shares currently bearing such legend. Shareholders may request that the
Company remove such legend in connection with resales prior to May 28,
1998, subject to the shareholder's ability to establish, to the
satisfaction of the Company and its legal counsel, that the requirements of
the U.S. Securities Act have been satisfied. After May 28, 1998, all Common
Shares that are then freely tradeable on The Toronto Stock Exchange will
trade under the symbol "SLX". The Common Shares offered by the Company
hereby will be registered under the U.S. Securities Act and will not,
therefore, carry a legend. See "Shares Eligible for Future Sale".
7
<PAGE>
<TABLE>
<S> <C>
Risk Factors.. Investment in the Common Shares may be regarded as speculative
due to the nature of the Company's business and the various
stages of development of its new products. In particular,
investors should consider that the Company has only one product
approved for sale, such approval relates to the sale of the
product only in the United Kingdom, and the product has not yet
been launched commercially. The Company has incurred operating
losses and cash flow deficiencies to date and does not expect to
achieve profitability on an annual basis before 2000. The
Company's products are subject to strict regulatory approval
requirements. The proceeds from this offering may be inadequate
to fund the development of the new products, and it is likely
the Company will require additional funding in the future. The
Company's success is dependent upon its relationships with
certain strategic partners and third party manufacturers, as
well as on its ability to adequately protect its intellectual
property. The Company is subject to intense competition and
faces risks arising from product liability. The Company is
dependent on certain key personnel. Certain directors and
executive officers and their respective affiliates own a
significant portion of the Company's stock and may be able to
effectively control the Company, even following consummation of
this offering. Following consummation of this offering, a
portion of the Common Shares will be subject to various
restrictions arising from U.S. securities laws. Investors
purchasing shares in this offering will incur immediate
dilution. In addition, the Company's Common Shares could be
subject to price volatility and have, to date, experienced
limited trading volume. Non-Canadian investors may face a
currency risk as a result of transactions involving the Common
Shares. See "Risk Factors".
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- -------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
License revenue......... $ -- $ -- $ 1,186 $ -- $ -- $ 1,000 $ 1,712
Revenue from
collaborative
agreements and other... 21 384 634 1,990 2,827 3,439 1,212
Loss from operations.... (2,575) (1,443) (2,569) (2,332) (1,497) (755) (1,023)
Net loss................ (2,475) (1,571) (2,451) (2,420) (1,452) (714) (1,011)
Net loss per
share(/1/)............. $ (0.35) $ (0.41) $ (0.46) $ (0.77) $ (0.46) $ (0.23) $ (0.38)
Shares used in computing
net loss per
share(/1/)............. 6,975 3,877 5,365 3,149 3,144 3,144 2,688
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
ACTUAL AS ADJUSTED(/2/)
-------- ----------------
(UNAUDITED)
<S> <C> <C>
SELECTED CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................ $ 3,657 $19,883
Working capital...................................... 2,986 19,212
Total assets......................................... 4,250 20,476
Accumulated deficit.................................. (11,076) (11,076)
Shareholders' equity................................. 3,181 19,407
</TABLE>
- --------
(1) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of shares used in computing net loss per share.
(2) Adjusted to give effect to the sale of 3,000,000 Common Shares offered by
the Company hereby at an assumed public offering price of Cdn. $8.50 per
Common Share (and an assumed exchange rate of Cdn. $1.3942 per U.S. $1.00)
and the application of the estimated net proceeds therefrom after deducting
estimated underwriting discounts and commissions and offering expenses
payable by the Company. See "Use of Proceeds" and "Capitalization".
------------
Except as otherwise indicated herein, all information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option.
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RISK FACTORS
An investment in the Common Shares offered by this Prospectus involves a
high degree of risk. Prospective purchasers of the Common Shares offered
hereby should carefully review the following risk factors as well as the other
information set forth in this Prospectus. This Prospectus contains forward-
looking statements based upon current expectations of future events that
involve risks and uncertainties. The Company's actual results and the timing
of certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Prospectus.
----------------
Dependence on Currently Licensed Products; Uncertainty of Regulatory
Approval of Company's Products. The Company's future success will depend,
among other factors, on its ability to in-license, develop, and commercialize
new pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex
Laboratories Limited ("Biorex") and Alfa Wassermann S.p.A. ("Alfa
Wassermann"), respectively. In addition, the Company has entered into
agreements relating to the development, commercialization, manufacture, and
marketing of Colazide, the disodium salt of balsalazide, with Astra AB, a
Swedish pharmaceutical company ("Astra"), and with a division of Menarini
Pharmaceutical Industries s.r.l., an Italian pharmaceutical company
("Menarini"). See "--Dependence on Exclusive Licenses" and "--Dependence on
Collaborative Partners".
Development, manufacture, and marketing of both balsalazide and rifaximin
are subject to extensive regulation by governmental authorities in the United
States and other countries. Neither drug has been approved by the United
States Food and Drug Administration ("FDA") for use in the United States. In
June 1997, the Company submitted a New Drug Application ("NDA") to the FDA
relating to Colazide as a therapy for acute ulcerative colitis. The NDA was
accepted for filing by the FDA in August 1997 and is subject to a detailed
substantive review. The Company believes that FDA approval to market Colazide
will not be obtained before mid-1998, if at all. In July 1997, the Medicines
Control Agency in the United Kingdom approved Colazide as a treatment for
acute ulcerative colitis in the United Kingdom, and the Company and its
partners, Astra and Menarini, are in the process of seeking approvals in other
member countries of the European Union through a mutual recognition procedure.
There can be no assurance that Colazide will receive approval from the FDA or
from regulatory agencies in any member country of the European Union other
than the United Kingdom. Even if such approvals are ultimately received, there
can be no assurance as to the timing of such approvals or market acceptance of
Colazide for the approved indications. With respect to rifaximin, Alfa
Wassermann is currently conducting a clinical trial in Spain relating to the
drug as a therapy for hepatic encephalopathy. The Company has not yet reviewed
the protocol for this trial, has not audited the data collection procedures,
and has not determined that such study is being conducted in accordance with
Good Clinical Procedures ("GCP"). There can be no assurance that the clinical
trial for rifaximin currently being performed by Alfa Wassermann will
demonstrate that the drug is safe and effective for the indication tested,
that such clinical trial will support the filing of an NDA for rifaximin as a
therapy for hepatic encephalopathy, that in the event an NDA is filed with the
FDA, the Company will be successful in obtaining regulatory approval in the
United States, or that the Company will obtain regulatory approval for
rifaximin from authorities in any other jurisdiction. The Company believes
that an NDA will not be filed for rifaximin prior to mid-1998 and that FDA
approval for rifaximin will not be obtained for at least one year after
filing, if at all. The Company expects that a significant portion of its
potential revenues for the next few years will depend on regulatory approval
and sales of these products. Failure to obtain regulatory approvals, delays in
obtaining regulatory approvals, obtaining regulatory approvals for Colazide or
rifaximin in only limited markets or for limited uses, or lack of market
acceptance for either product, to the extent regulatory approvals are
obtained,
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would have a material adverse effect on the Company's business, financial
condition, and results of operations. See "--Significant Government Regulation;
No Assurance of Product Approvals" and "Business--Products Under Development".
Limited Operating History and History of Operating Losses. The Company has
only a limited history of operations consisting primarily of development of its
products and sponsorship with third parties of research and clinical trials.
The Company has had no earnings to date and has not realized any material
operating revenues from product sales, either directly by the Company or
indirectly through its development and distribution partners. Substantially all
of the Company's revenues to date have been derived from milestone payments
from the Company's collaborative partners related to the development of
Colazide. As of June 30, 1997, the Company had incurred cumulative losses since
inception of approximately $11.1 million. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Expectation of Future Losses. The Company currently expects operating losses
to continue at least through 1999 and to increase from current levels prior to
1999 as the Company continues to develop Colazide and rifaximin. The Company's
future operating performance will depend on the timing of regulatory approvals
of Colazide and rifaximin, particularly the timing of FDA approval, and if such
approvals can be obtained, will also depend on market acceptance. See "--
Uncertainty of Market Acceptance; Lack of Sales and Marketing Experience", "--
Future Capital Needs; Uncertainty of Additional Funding", and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Dependence on Collaborative Partners. The initial commercialization of
Colazide in the United Kingdom and, to the extent regulatory approval is
obtained, in other countries in which the Company has commercial rights to
Colazide is entirely dependent on Astra and Menarini, in their respective
territories. Under its agreements with Astra, the Company has granted Astra
exclusive rights to distribute and sell Colazide on a worldwide basis with the
exception of Italy, Spain, Portugal, and Greece, where the Company has granted
exclusive distribution rights to Menarini, and with the exception of Japan,
Taiwan, and Korea, where the Company does not have rights to Colazide. Although
Astra has agreed to use its best endeavors to promote, market, and sell
Colazide in its exclusive markets, there are no specified financial thresholds
that must be achieved for Astra to maintain its exclusivity. The Company's
agreements with Astra provide for, with respect to Europe, a term of 15 years
and, with respect to the United States, a term ending on the later to occur of
the expiration date of the last expiring patent and the date 9 years from the
first commercial launch date of Colazide but, in either event, the agreements
may be terminated earlier by either party upon the occurrence of specified
events, including a material breach.
The Company's agreements with Astra require Astra to accomplish the
commercial launch of Colazide in any jurisdiction within 90 days of receipt of
regulatory approval in that jurisdiction, subject to a 90 day cure period
during which period Astra has the opportunity to accomplish the commercial
launch without triggering Salix's rights to terminate the Agreement or amend it
to make Astra's right non-exclusive. The Company received marketing approval
for Colazide in the United Kingdom from the Medicine Controls Agency in July
1997, and the Company and Astra have announced that the commercial launch of
Colazide is expected to occur in the United Kingdom in October 1997, based on a
selling price set by Astra. Following regulatory approval of Colazide in each
country in Europe where Astra has exclusive distribution rights, the Company
and Astra must agree on the Colazide sales price for such country, which may be
less than the selling price in the United Kingdom. The agreed sales price for
Colazide will directly affect the Company's revenues because the parties'
agreement obligates Astra to purchase Colazide from the Company, and the
Company to supply Colazide to Astra, at a transfer price equal to a percentage
of Astra's selling price. The Company does not anticipate significant margins
from Colazide sales by Astra in the United Kingdom or in continental Europe,
where pricing has not yet been determined. In addition, while the Company has
been advised by both Astra and Menarini that they intend to seek approval in
other European countries through the mutual recognition procedures of the
European Union (the "EU"), the decision as to which approvals to seek, the
order in which to seek them and the responsibility to complete the approval
process lies with Astra and Menarini.
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There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that its current or
future collaborative arrangements, including the agreements with Astra or
Menarini, will be successful or will not be terminated by the other party.
Although the Company believes that parties to any collaborative arrangements
would have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities in most instances will not be within the control of the Company.
Failure of the Company and its collaborative partners to develop,
commercialize, manufacture or market products, including Colazide, would have
a material adverse effect on the Company's business, financial condition, and
results of operations.
Significant Governmental Regulation; No Assurance of Product Approvals. The
production and marketing of the Company's products and its ongoing research
and development activities are subject to extensive regulation by governmental
authorities in the United States and other countries. Failure to comply with
FDA or other applicable regulatory requirements may subject a company to
administrative sanctions or judicially imposed sanctions such as civil
penalties, criminal prosecution, injunctions, product seizure or detention,
product recalls, total or partial suspension of production. In addition, non-
compliance may result in the FDA's refusal to approve pending NDAs or
supplements to approved NDAs or in the withdrawal of an NDA. Any such sanction
could result in adverse publicity, which could have a material adverse effect
on the Company's business, financial condition, and results of operation. The
Company has not received regulatory approval in the United States or any
foreign jurisdiction other than the United Kingdom for the commercial sale of
any of its products. Prior to marketing in the United States, any drug
developed by the Company must undergo rigorous preclinical (animal) and
clinical (human) testing and an extensive regulatory approval process
implemented by the FDA under the United States Federal Food, Drug and Cosmetic
Act, and implementing regulations. Satisfaction of such regulatory
requirements, which includes satisfying the FDA that the product is both safe
and effective for its proposed uses, typically takes several years or more,
depending upon the type, complexity, and novelty of the product, and requires
the expenditure of substantial resources. Preclinical studies must be
conducted in conformance with the FDA's Good Laboratory Practice regulations.
Clinical testing, which is rigorously regulated, must meet requirements for
Institutional Review Board oversight and informed consent, as well as FDA
prior review and oversight, and Good Clinical Practice requirements. The
Company has limited experience in conducting preclinical and clinical testing
necessary to obtain regulatory approval and will rely on clinical research
organizations ("CROs") to perform this work. There can be no assurance that
those conducting clinical trials for the Company will be able to initiate
trials at preferred clinical test sites or recruit sufficient test subjects or
that clinical trials will be started or completed successfully in a timely
fashion, if at all, with respect to any of the Company's products.
Furthermore, the Company or the FDA may suspend clinical trials at any time if
it believes that the subjects participating in such trials are being exposed
to unacceptable health risks. There can be no assurance that the Company will
not encounter problems in clinical trials which will cause the Company or the
FDA to delay or suspend clinical trials.
On June 23, 1997, the Company submitted an NDA to the FDA covering the use
of Colazide as a therapy for acute ulcerative colitis and in August 1997, the
NDA was accepted for filing by the FDA. The NDA can be approved only if the
FDA determines that the NDA contains substantial evidence from clinical trials
that the drug is safe and effective for its intended use. There can be no
assurance that the results of the Company's preclinical or clinical studies,
including its United States Phase III clinical testing in combination with the
results from a European Phase III safety and efficacy study, will demonstrate,
to the FDA's satisfaction, substantial evidence that the drug is safe and
effective. If clinical data, in addition to that filed in the NDA, is
requested from the Company to support approval of Colazide, such a request is
likely to delay significantly any pending review and approval of the product,
if approval is granted at all. It is unlikely the FDA will approve marketing
of Colazide in the United States before mid-1998, if at all. If regulatory
approval of Colazide or any other product is granted, such approval will be
limited to those disease states and conditions for which the product has been
shown to be safe and effective, as demonstrated to the FDA's satisfaction
through well controlled clinical studies. Furthermore, approval may
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entail ongoing requirements for post-marketing studies. Even if such regulatory
approval is obtained, a marketed product, promotional activities for the
product, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections. In addition, identification of
certain side effects after a drug is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval,
reformulation of the drug, additional preclinical testing or clinical trials
and changes in labeling of the product. The Company does not expect to file an
NDA for rifaximin prior to mid-1998 and will do so only if the clinical trials
support such a filing. See "Business--Government Regulation".
Pursuant to the license agreements with Astra and Menarini, Astra and
Menarini will decide which EU countries to seek approval in pursuant to the
mutual recognition procedures of the EU and are responsible for the process of
obtaining such approval. The Company has been advised that Astra intends
initially to seek approval through the EU's mutual recognition procedure in
Germany, France and the Netherlands and that Menarini will seek approval
initially in Italy, Spain, Portugal and Greece. Regulatory approvals for the
marketing of Colazide in European countries other than the United Kingdom are
not expected until 1998. There can be no assurance that Astra and Menarini will
seek such approvals or that any such countries will grant such approval.
Dependence on Third Parties for Manufacturing. The Company currently does not
intend to manufacture its potential pharmaceutical products, including Colazide
and rifaximin, and, therefore, will be dependent on contract manufacturers for
the production of such products for development and commercial purposes. In the
event that the Company is unsuccessful in obtaining or retaining third-party
manufacturing or if the Company's manufacturers experience production
difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. The Company's
initial product, Colazide, has never been manufactured in commercial
quantities. No assurances can be given that the Company, or its manufacturing
partners, will be able to manufacture Colazide (or other future developed
products) in commercial quantities that would enable the Company to meet its
business objectives. Under the terms of the Company's distribution agreements
with Astra and Menarini, the obligations of such companies to purchase product
will terminate under certain circumstances in which the Company is unable or
unwilling to adequately supply them with product. In such circumstances, Astra
or Menarini, as the case may be, is granted a temporary license to manufacture
Colazide. Under certain situations, such manufacturing licenses may become
permanent, in which case the Company's revenues from the arrangements could be,
depending on the circumstances, severely reduced or eliminated. Moreover,
contract manufacturers that the Company may use must adhere to current Good
Manufacturing Practices ("GMPs"), which are regulations strictly enforced by
the FDA through its facilities inspection program. If these facilities cannot
pass a pre-approval plant inspection, the likelihood of the FDA's pre-market
approval of Colazide will be adversely affected. Certain material manufacturing
changes that may occur after approval are also subject to FDA review and
approval. There can be no assurance that the FDA or other regulatory agencies
will approve the processes or the facilities by which any of the Company's
products may be manufactured. In addition, if the facilities cannot pass
regular post-approval FDA inspections, manufacturing and distribution may be
disrupted, recalls of distributed products may be necessary, and other
sanctions could be applied. Any disruption in the supply in manufacturing and
marketing of the Company's proposed products would have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Dependence on In-Licensing and Acquisition of New Products for Future Growth.
Whether or not Colazide or rifaximin receives regulatory approvals and is
successfully marketed, the Company's ability to grow in the future will depend
on its success in in-licensing or acquiring additional pharmaceutical products.
The Company seeks to in-license or acquire pharmaceutical products that have
been developed beyond the initial discovery phase and for which late-stage
human clinical data is already available. There can be no assurance that such
pharmaceutical products will be available on attractive terms for in-licensing
or acquisition by the Company.
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Uncertainties Related to Clinical Trials of Development Stage Products. Any
product in-licensed by Salix will likely require significant further research
and development, including clinical testing, regulatory approval, and
investment prior to commercialization, and as a result will be subject to the
risks of failure inherent in the development of therapeutic products based on
innovative technologies. These risks include the possibility that any or all
of these proposed products may not be found to be safe or effective or that
they may otherwise fail to receive necessary regulatory approvals; that the
proposed products will prove uneconomical to market or will not achieve broad
market acceptance; that third parties will hold proprietary rights that
prevent the marketing of the proposed products; or that third parties will
market a superior or equivalent product. In addition, due to the extended
testing and regulatory review process required before marketing approval can
be obtained, the time-frames for commercialization of any products are long
and uncertain. See "Business--Government Regulation".
Uncertainty of Market Acceptance. The Company's future success will depend
in part on its ability to develop and commercialize new products, including
Colazide and rifaximin, or new formulations of or indications for current
products. Assuming the Company can successfully develop such products and
obtain regulatory approvals, their future success will depend upon their
acceptance by the medical community and third-party payors as useful and cost-
effective. Market acceptance will depend upon several factors, including the
establishment of the safety, effectiveness, patient tolerance, and cost of the
Company's products relative to those of competitors. The Company and its
collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Lack of Sales and Marketing Experience. The Company has no experience
marketing and selling its products either directly or through distributors.
The Company's sales and marketing strategy for Colazide relies on its third-
party distributors, Astra and Menarini, to whom the Company has granted
exclusive marketing rights. There can be no assurance that either Astra or
Menarini will market Colazide successfully in any country in which they have
exclusive rights. The Company intends to establish its own direct sales force
for the purpose of achieving direct sales of rifaximin and other future
products. There can be no assurance that the Company's marketing and direct
sales efforts will be successful.
Dependence on Exclusive Licenses. The Company's rights to balsalazide and
rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are
subject to early termination by Biorex or Alfa Wassermann, as the case may be,
under certain circumstances, including material breach by the Company, the
bankruptcy or insolvency of the Company, the failure to commence marketing of
products within specified periods after their regulatory approval, or the
Company's failure to satisfy its manufacturing obligations under its
agreements with distribution partners. In the event that Biorex or Alfa
Wassermann terminate their respective license agreements, the Company would
have no further rights to utilize their respective patents or trade secrets to
manufacture and market products based on balsalazide or rifaximin, as the case
may be. The Company's licenses for balsalazide and rifaximin provide that the
Company's royalty obligations may extend beyond the expiration date of the
underlying patents, which could have a material adverse effect on the
Company's business, financial condition, and results of operations in the
event a generic version of balsalazide or rifaximin, as the case may be, were
introduced. In addition, the Company's license agreement with Alfa Wassermann
also provides that the Company may not promote, distribute or sell any
antibiotic products that compete with rifaximin in its licensed territory (the
United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the
Company's ability to in-license, develop, or market such products. See
"Business--Strategic Alliances".
Patents and Proprietary Rights; Expiration of Patents. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade
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secret protection for new technologies, products and processes. Because the
Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such
products may have limited or no remaining patent protection due to the time
elapsed since their discovery. The patents for the Colazide composition of
matter and method of treating ulcerative colitis with Colazide expire in July
2001 in the United States, February 2002 in the United Kingdom, May 2002 in
France, July 2001 in Italy, and April 2002 in Germany. The patents for the
method of treating colon cancer using Colazide expire in January 2014 in the
United States and, assuming patents issue from pending applications, in
January 2015 in various countries in Europe, Asia, and North America. The
patents for the rifaximin composition of matter (also covering the process of
making rifaximin and using rifaximin to treat gastrointestinal infectious
diseases) expire in May 2001 in the United States and Canada. The patents for
the process of making rifaximin expire in April 2005 in both the United States
and Canada. Patents for the use of rifaximin for H. pylori infections expire
in June 2013 in the United States and February 2014 in Canada. Although the
Company believes it may be granted extensions of up to five years in certain
circumstances, based on patent term restoration procedures established in
Europe and in the United States under the Waxman-Hatch Act for products that
have received regulatory approval, there is no assurance that such extensions
will be granted. See "--Uncertainty Regarding Waxman-Hatch Act and Similar
Foreign Laws". The Company has filed applications for use patents for
additional indications using balsalazide and related chemical substances.
There can be no assurance that any patents will be issued. There can be no
assurance that competitors will not develop products based on the same active
ingredients for marketing as soon as the applicable patents expire or at any
time thereafter or that competitors will not design around existing patents.
Sales of such generic versions could have an adverse effect on the Company's
business, financial condition, and results of operations. The Company's
success will depend in part on its ability to obtain United States and foreign
patent protection for its products and processes, preserve its trade secrets,
and operate without infringing on the proprietary rights of third parties.
There can be no assurance that patents will issue with respect to, or that the
claims allowed will provide sufficient protection to, the Company's present or
future technology.
There can be no assurance that any other patents will be issued on any of
the Company's patent applications or on patent applications licensed from
third parties. Moreover, there can be no assurance that the claims allowed in
the patents or patent applications are or will be sufficiently broad to
protect the Company's technology or that the patents will provide protection
against competitive products or otherwise be commercially valuable.
Furthermore, as with any pharmaceutical company, the Company's patent and
other proprietary rights are subject to uncertainty. The Company's patent or
other proprietary rights related to its products might conflict with current
or future rights of others. For instance, there is no assurance that the use
of the Company's technology will not infringe the patent rights of others. For
the same reasons, the products of others could infringe the patent or other
proprietary rights of the Company. Litigation or patent interference
proceedings, either of which could result in substantial cost to the Company,
may be necessary to enforce any patents issued to and other proprietary rights
of the Company or to determine the scope and validity of other parties'
proprietary rights. The defense and prosecution of patent and intellectual
property claims are both costly and time-consuming, even if the outcome is
favorable to the Company. Any adverse outcome could subject the Company to
significant liabilities to third parties, require disputed rights to be
licensed from third parties, or require the Company to cease selling its
products.
In addition to patent protection, the Company also relies on trade secrets,
proprietary know-how and technological advances which it seeks to protect, in
part, through confidentiality agreements with its collaborative partners,
employees and consultants. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach, or that the Company's trade secrets and proprietary know-how will not
otherwise become known or be independently developed by others.
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There can be no assurance that the Company will be able to obtain a license
to any third-party technology that it may require to conduct its business or
that, if obtainable, such technology can be licensed at a reasonable cost.
Failure by the Company to obtain a license to any technology that it may
require to commercialize its technologies or products will have a material
adverse effect on the Company. In addition, there can be no assurance that
others will not independently develop substantially equivalent proprietary
information or obtain access to the Company's know-how, or that others will
not be issued patents which prevent the manufacture or sale of Company
products or require licensing and the payment of significant fees or royalties
by the Company in order for it to be able to carry on its business.
Litigation, which could result in substantial cost to the Company, may be
necessary to enforce or defend the Company's patents or proprietary rights.
Uncertainty Regarding Waxman-Hatch Act and Similar Foreign Laws. Certain
provisions of the Waxman-Hatch Act provide patent term extensions for the
first permitted commercial marketing or use of a new drug that is subject to
regulatory review prior to marketing. Under the Waxman-Hatch Act, the Patent
and Trademark Office is directed to extend the term of an eligible patent for
a time equal to the "regulatory review period for the approved product". This
time period is generally one-half the length of time between the effective
date of the IND and submission of the NDA, plus the length of time between
filing and approval of the NDA, up to a total possible extension of five
years. Periods during which the applicant did not act with "due diligence" are
subtracted from the regulatory review period. Under this law, the Colazide
patent in the United States could be extended by up to five years, giving the
product patent protection until as late as 2006 if approval in the United
States is received before expiration of the original patent term in 2001. In
addition, the Company intends to seek patent extensions under similar laws in
effect in the European Union, which could give Colazide patent protection in
these jurisdictions until as late as 2006. There can be no assurance that any
of the benefits of the Waxman-Hatch Act or similar foreign laws will be
available to the Company or that such laws will not be amended or repealed.
Uncertain Availability of Health Care Reimbursement; Health Care Reform
Proposals. The Company's ability to commercialize gastrointestinal products
may depend in part on the extent to which reimbursement for the costs of such
products and related treatments will be available from government health
administration authorities, private health insurers and others. Significant
uncertainty exists as to the reimbursement status of newly approved health
care products. There can be no assurance of the availability of adequate third
party insurance reimbursement coverage that would enable the Company to
establish and maintain price levels sufficient for realization of an
appropriate return on its investment in developing new therapies. Government
and other third party payors are increasingly attempting to contain health
care costs by limiting both coverage and the level of reimbursement for new
therapeutic products approved for marketing by the FDA and by refusing, in
some cases, to provide any coverage for uses of approved products for disease
indications for which the FDA has not granted marketing approval. If adequate
coverage and reimbursement levels are not provided by government and third
party payors for uses of the Company's therapeutic products, the market
acceptance of these products could be adversely affected.
Health care reform proposals have been introduced in the United States
Congress and in various state legislatures in the United States. It is
currently uncertain whether any health care reform legislation will be enacted
at the federal level or what actions governmental and private payors may take
in response to the suggested reforms. The Company cannot predict when any
suggested reforms will be implemented, if ever, or the effect of any
implemented reforms on the Company's business. There can be no assurance that
any implemented reforms will not have a material adverse effect on the
Company's future results of operations. Such reforms, if enacted, may affect
the availability of third party reimbursement for products developed by the
Company as well as the price levels at which the Company is able to sell such
products. In addition, to the extent that the Company is able to commercialize
products in markets outside the United States, the Company's ability to
achieve success in such markets will depend, in part, on the health care
financing and reimbursement policies of such countries.
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Intense Competition. Competition in the pharmaceutical industry is intense
and characterized by extensive research efforts and rapid technological
progress. The Company believes that there are numerous pharmaceutical and
biotechnology companies, both public and private and including large well-
known pharmaceutical companies, as well as academic research groups throughout
the world engaged in research and development efforts with respect to
pharmaceutical products targeted at gastrointestinal diseases and conditions
addressed by the Company's current and potential products. In particular, the
Company is aware of products in research or development by competitors that
address the diseases being targeted by the Company's products. There can be no
assurance that developments by others will not render the Company's current
and potential products obsolete or non-competitive. Competitors may be able to
complete the development and regulatory approval process sooner and,
therefore, market their products earlier than the Company. Many of the
Company's competitors have substantially greater financial, marketing and
personnel resources and development capabilities than the Company. For
example, many large, well capitalized companies already offer products in the
United States and Europe that target the proposed indications for Colazide,
including mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia
& Upjohn, Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion
Roussel, Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine
(Pharmacia & Upjohn, Inc.). Technological developments by competitors, earlier
regulatory approval for marketing competitive products, or superior marketing
capabilities possessed by competitors could adversely affect the commercial
potential of the Company's products, including Colazide, and could have a
material adverse effect on the Company's business, financial condition, and
results of operations. In addition, manufacturers of generic drugs may seek to
compete directly with the Company's products in the absence of effective
patent protection or non-patent exclusivity protection.
Future Capital Needs; Uncertainty of Additional Funding. The Company
believes that the anticipated net proceeds of this offering, together with the
Company's existing cash reserves and cash flows from operations, should be
sufficient to satisfy the cash requirements of the Company through at least
1998. The Company's actual cash requirements will depend on numerous factors,
including the costs of obtaining regulatory approvals, including FDA
approvals; costs associated with the commercialization of Colazide in the
United Kingdom and, if necessary regulatory approvals are obtained, in other
member countries of the European Union and the United States; the Company's
research and development efforts, including expenditures in connection with
alliances, license agreements and acquisitions of and investments in
additional pharmaceutical products; the cost of filing, prosecuting, defending
and enforcing intellectual property rights; and the purchase or lease of
additional capital equipment. There can be no assurance that changes in the
Company's product offerings, product development plans or other changes
affecting the Company's operating expenses will not result in unanticipated
increases in expenditures of the Company's capital resources. In addition, the
Company anticipates that it will need to raise additional funds in the form of
debt or equity financing to fund future licensing, development and
commercialization of new products. If additional capital is raised through the
sale of equity or convertible debt securities (including warrants or other
convertible securities issued in connection with any debt financing),
additional dilution to existing shareholders could result. There can be no
assurance that additional funding will be available on commercially reasonable
terms, if at all. If required funds are not available, the Company may be
compelled to curtail operations or to obtain funds through collaborative
arrangements that may require the Company to relinquish rights to certain of
its products, product candidates, or potential markets. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Currency Fluctuations. A significant portion of the Company's business is
conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Due to the substantial volatility
of currency exchange rates, among other factors, the Company cannot predict
16
<PAGE>
the effect of exchange rate fluctuations upon future operating results. There
can be no assurance that the Company will not experience currency losses in
the future. The Company has not previously undertaken hedging transactions to
cover its currency exposure but may hedge a portion of its currency exposure
in the future as management deems appropriate. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
Management of Growth. The Company expects to experience significant growth
in the number of its employees and the scope of its operations. This growth is
expected to place a significant strain on the Company's management and
operations. The Company's ability to manage such growth effectively will
depend upon its ability to broaden its management team and its ability to
attract, hire, and retain skilled employees. The Company's success will also
depend on the ability of its officers and key employees to continue to
implement and improve its operational, management information and financial
control systems and to expand, train and manage its employee base. The
Company's inability to manage growth effectively could have a material adverse
effect on the Company's business, financial condition and results of
operations.
Product Liability and Insurance; No Assurance of Adequate Insurance
Coverage. The Company's business exposes it to potential product liability
risks which are inherent in the testing, manufacture, and marketing of human
therapeutic products. The Company currently has product liability insurance
providing coverage of $1 million per occurrence and $1 million in the
aggregate. There can be no assurance that the Company will be able to maintain
its current product liability insurance, that such insurance will provide
adequate coverage against potential losses, or that such insurance will remain
available to the Company at acceptable costs. Claims or losses in excess of
any liability insurance coverage obtained by the Company could have a material
adverse effect on the business, financial condition, or results of operations
of the Company.
Dependence on Key Personnel; Ability to Recruit Personnel. The Company is
dependent upon a number of key management and technical personnel, none of
whom is bound by an employment agreement with the Company, including Randy
Hamilton, Chairman, Chief Executive Officer and President, Lorin Johnson, Vice
President, Research, and James Shook, Senior Vice President, Development
(Salix Pharmaceuticals). The loss of the services of one or more key employees
could have a material adverse effect on the Company. The Company's success
will also depend on its ability to attract and retain additional highly
qualified management and technical personnel. The Company faces intense
competition for qualified personnel, many of whom are often subject to
competing employment offers. In the event the Company obtains regulatory
approvals for rifaximin, it intends to sell rifaximin through a small direct
sales force. New employees, particularly new sales and marketing employees,
will require substantial training and education concerning the Company's
products. There can be no assurance that the Company will be successful in
attracting and retaining qualified personnel as necessary, and the failure to
do so could have a material adverse effect on the Company's business,
operating results, and financial condition.
Control by Directors and Executive Officers. The Company's directors,
executive officers, and entities affiliated with them will, in the aggregate,
beneficially own approximately 33% of the Company's outstanding Common Shares
immediately after the completion of this offering. Accordingly, these
shareholders as a group could effectively control the Company on substantially
all matters requiring approval by the shareholders of the Company, including
the election of directors and the approval of mergers or other business
combination transactions. See "Principal Shareholders".
Shares Eligible for Future Sale. Sales of a substantial number of Common
Shares in the public market following this offering could adversely affect the
market price for the Common Shares. The number of Common Shares available for
resale in the public market by holders in the United States is limited by
restrictions under the United States Securities Act of 1933, as amended (the
"U.S. Securities Act"), including Rule 144 and Regulation S. Following this
offering, all of the 3,000,000 Common Shares sold in this offering will be
freely tradeable in the United States without restriction (unless such shares
17
<PAGE>
are held by an "affiliate" of the Company as such term is defined in the U.S.
Securities Act) and will trade on The Toronto Stock Exchange under the symbol
"SLX". An additional 2,200,000 Common Shares were issued in connection with
the Company's initial public offering in Canada in May 1996 (the "Canadian
IPO"). The Common Shares issued in the Canadian IPO and all other outstanding
Common Shares available for resale under applicable securities laws currently
trade on The Toronto Stock Exchange under the symbol "SLX.s", carry a legend
reflecting the Company's reliance, in connection with the Canadian IPO, on the
exemption from the registration requirements of the U.S. Securities Act set
forth in Regulation S thereunder and are not presently available for resale in
the United States or to "U.S. Persons" (as defined in Regulation S) in the
absence of an exemption from registration under the U.S. Securities Act. It is
the Company's current intention to authorize the removal of the Regulation S
legend from all shares currently bearing the legend on May 28, 1998. After May
28, 1998, all shares that are then freely tradeable on The Toronto Stock
Exchange will trade under the symbol "SLX". Prior to May 28, 1998,
shareholders may request that the Company remove applicable legends in
connection with resales on The Toronto Stock Exchange, subject to the
shareholder's ability to establish, to the satisfaction of the Company and its
legal counsel, that such shares may be resold in the United States in
compliance with the requirements of the U.S. Securities Act. Following removal
of the legend, such Common Shares will be freely tradeable in the United
States without restriction or further registration under the U.S. Securities
Act, except for shares held by "affiliates" of the Company as that term is
defined in Rule 144 under the U.S. Securities Act.
Of the 7,118,173 Common Shares outstanding prior to the completion of this
offering, except for shares purchased by affiliates of the Company, (i) the
2,200,000 Common Shares issued in connection with the Canadian IPO and
approximately 500,000 Common Shares issued in other transactions will be
available for resale in accordance with Regulation S at any time on The
Toronto Stock Exchange, subject to the legend removal conditions set forth
above, and (ii) approximately 1,165,000 Common Shares will be available for
resale only in compliance with Rule 144(k) or another exemption under the U.S.
Securities Act. Approximately 3,259,000 Common Shares are held by affiliates
of the Company and are subject to additional legal and contractual
restrictions on resale. See "--Price Volatility; Limited Trading Volume" and
"Shares Eligible for Future Sale".
Price Volatility; Limited Trading Volume. The securities markets have from
time to time experienced significant price and volume fluctuations that may be
unrelated to the operating performance of particular companies. In addition,
the market prices of the common stock of many publicly traded pharmaceutical
and biotechnology companies have in the past and can in the future be expected
to be especially volatile. Announcements of technological innovations or new
products by the Company or its competitors, developments or disputes
concerning proprietary rights, publicity regarding actual or potential medical
results relating to products under development by the Company or its
competitors, regulatory developments in both the United States and other
countries, public concern as to the safety of pharmaceutical products and
economic and other external factors, as well as period-to-period fluctuations
in the Company's financial results, may have a significant impact on the
market price of the Company's Common Shares. The Company's Common Shares have
been traded on The Toronto Stock Exchange since May 1996. Prior to this
offering, the Common Shares have not been freely tradable in the United
States, and after this offering, no public trading market will exist for the
Common Shares in the United States. In addition, trading volume in the Common
Shares on The Toronto Stock Exchange has been low, and there can be no
assurances that an active trading market will develop or be sustained on The
Toronto Stock Exchange, or any other exchange or dealer quotation system,
following this offering. See "Price Range of Common Shares".
Currency Risk to Non-Canadian Investors. The Common Shares offered hereby
will be sold in Canadian dollars and will trade in Canadian dollars on The
Toronto Stock Exchange. In addition to the general market risks associated
with ownership of equity securities and the more specific risks of ownership
of the Common Shares as set forth herein, non-Canadian purchasers will also
bear exchange rate risks resulting from fluctuations in the relative values of
the Canadian dollar and foreign currencies.
18
<PAGE>
The value of the Canadian dollar has fluctuated substantially in the past
relative to the United States dollar and other currencies and may continue to
do so in the future. As a result, for non-Canadian investors, the value of the
Common Shares in United States dollars and other currencies may vary
independent of changes in the trading price of the Common Shares on The
Toronto Stock Exchange and for reasons unrelated to the Company or its
business, results of operations, or financial condition.
Foreign Corporation Risks. The Company is an International Business Company
incorporated under the laws of the British Virgin Islands. Accordingly,
principles of law relating to such matters as the validity of corporate
procedures, the fiduciary duties of management and the rights of the Company's
shareholders and other stakeholders may differ from those that would apply if
the Company were incorporated in a jurisdiction within the United States or
Canada. The shareholders and other stakeholders of Salix may have more
difficulty in protecting their interests in the face of actions by the Board
of Directors of the Company or a majority shareholder than they might have
with respect to a corporation incorporated in a jurisdiction in the United
States or Canada. See "Comparison of Canadian, United States and British
Virgin Islands Corporate Laws".
Immediate and Substantial Dilution. The estimated offering price of the
Company's Common Shares in this offering is substantially higher than the book
value per Common Share. Investors purchasing shares in this offering will,
therefore, incur immediate dilution of Cdn. $5.83 (U.S. $ 4.18) in net
tangible book value per Common Share from the estimated offering price after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company and will be subject to additional
dilution upon the exercise of outstanding stock options. See "Dilution".
Discretion as to Use of Proceeds. Although the Company presently intends to
apply the net proceeds of this offering in the manner described under "Use of
Proceeds", it has broad discretion within such proposed uses as to the
allocation of the net proceeds, the timing of expenditures, and all other
aspects relating to the application of such proceeds. The Company reserves the
right to reallocate the net proceeds of this offering as management, in its
discretion, deems necessary or advisable. There can be no assurance that the
actual allocation of the offering proceeds will not differ materially from
their currently anticipated use.
19
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 Common Shares
offered hereby are estimated to be approximately Cdn. $22,622,575
(approximately Cdn. $26,198,950 if the Underwriters' over-allotment option is
exercised in full) at an assumed public offering price (which is not
indicative of the actual offering price of the Common Shares) of Cdn. $8.50
per share and after deducting estimated underwriting discounts and commissions
and offering expenses payable by the Company. The Underwriters will pay the
proceeds of the offering to the Company in Canadian dollars. The Company will
convert such proceeds to United States dollars as soon as practicable after
the offering. Based on an assumed exchange rate of Cdn. $1.3942 per U.S.$1.00,
the net proceeds to the Company from the sale of the 3,000,000 Common Shares
offered hereby are estimated to be approximately U.S.$16,226,205
(approximately U.S.$18,791,386 if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use the net proceeds of the offering for working
capital and other general corporate purposes, including to fund research and
development activities and capital expenditures. Of the offering proceeds, the
Company expects to apply approximately Cdn. $4,000,000 (U.S.$2,869,029) toward
the commercialization of Colazide in the United Kingdom and obtaining
regulatory approval in the United States, approximately Cdn. $15,622,575
(U.S.$11,205,404) toward the Company's other product development and clinical
programs, and approximately Cdn. $3,000,000 (U.S.$2,151,772) for other working
capital and general corporate purposes. See "Business--Products Under
Development". The Company's allocation of offering proceeds to other product
development and clinical programs will be increased by the amount of any net
proceeds resulting from the exercise of the Underwriters' over-allotment
option. The amount and timing of these expenditures will depend on numerous
factors either outside of or only partially within the Company's control,
including the results of the Company's research and development programs, the
regulatory approval process, technological advances by the Company and other
pharmaceutical companies, the terms of collaborative agreements entered into
by the Company and the status of competitive products. As a result, there can
be no assurance that the actual allocation of the net proceeds of this
offering will not differ materially from their currently anticipated use. The
Company may also use a portion of the net proceeds for the acquisition of
technologies, businesses or products that are complementary to those of the
Company, although the Company does not presently have any agreements to effect
any such acquisitions, and no portion of the net proceeds has been allocated
for any specific acquisition. Pending such uses, the net proceeds of this
offering will be invested in short-term, interest-bearing, investment grade
securities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources".
20
<PAGE>
PRICE RANGE OF COMMON SHARES
The Company's Common Shares have been quoted on The Toronto Stock Exchange
under the symbol "SLX.s" since the Company's Canadian IPO in May 1996. The
3,000,000 Common Shares offered hereby will be quoted on The Toronto Stock
Exchange under the symbol "SLX". Beginning on May 28, 1998, all the Company's
Common Shares available for resale on The Toronto Stock Exchange will trade
under the symbol "SLX". See "Shares Eligible for Future Sale". The following
is a summary of the market price range in Canadian dollars and the aggregate
volume for the Common Shares as reported on The Toronto Stock Exchange for the
periods indicated.
<TABLE>
<CAPTION>
SHARE
HIGH (CDN.$) LOW (CDN.$) VOLUME
------------ ----------- ---------
<S> <C> <C> <C>
Fiscal Year ending December 31, 1997
August 1, 1997 to August 13, 1997.......... $8.80 $8.40 24,550
July 1997.................................. 9.00 7.75 129,479
June 1997.................................. 9.25 7.60 267,860
May 1997................................... 9.95 8.80 207,761
April 1997................................. 9.40 8.90 164,662
Second Quarter 1997........................ 9.95 7.60 640,283
First Quarter 1997......................... 9.35 4.25 1,016,263
Fiscal Year ended December 31, 1996
Fourth Quarter............................. 5.95 4.50 625,388
Third Quarter.............................. 6.60 5.00 428,425
Second Quarter (from May 27, 1996)......... 7.50 6.20 241,800
</TABLE>
On August 13, 1997, the closing price for the Common Shares as reported on
The Toronto Stock Exchange was Cdn. $8.50 per share. As of July 31, 1997,
there were 76 shareholders of record.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its share capital.
The Company currently expects to retain future earnings, if any, for use in
the operation and expansion of its business and does not anticipate paying any
cash dividends in the foreseeable future.
21
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1997, the capitalization of
the Company, both actual and as adjusted to give effect to the Company's
receipt of net proceeds from the sale of the 3,000,000 Common Shares offered
hereby at an assumed public offering price (which is not indicative of the
actual offering price of the Common Shares) of Cdn. $8.50 per share (and an
assumed exchange rate of Cdn. $1.3942 per U.S. $1.00) and the application of
the estimated net proceeds therefrom. The capitalization information set forth
below should be read in conjunction with the Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Shareholders' equity:
Common shares, no par value; 20,000,000 shares
authorized, 7,118,173 shares issued and outstanding,
actual; 20,000,000 shares authorized, 10,118,173
shares issued and outstanding, as adjusted(/1/)....... $ 14,257 $ 30,483
Accumulated deficit.................................... (11,076) (11,076)
-------- --------
Total shareholders' equity........................... 3,181 19,407
-------- --------
Total capitalization............................... $ 3,181 $ 19,407
======== ========
</TABLE>
- --------
(1) Excludes (i) 713,500 Common Shares issuable upon exercise of options
outstanding as of June 30, 1997 under the Stock Plans, with a weighted
average exercise price of $3.72 per Common Share, (ii) 303,362 Common
Shares reserved for issuance under future option grants as of June 30,
1997 under the Stock Plans, and (iii) 602,331 Common Shares issuable upon
exercise of outstanding warrants as of June 30, 1997 at an exercise price
of $3.00 per Common Share. See "Management--Stock Plans", "Description of
Share Capital" and Notes 8 and 10 of Notes to Consolidated Financial
Statements.
22
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1997 was
approximately $3.2 million or $0.45 per Common Share. "Net tangible book
value" per share represents the amount of total tangible assets less total
liabilities, divided by the number of Common Shares outstanding. After giving
effect to the receipt of the net proceeds from the sale of the 3,000,000
Common Shares offered by the Company hereby at an assumed public offering
price (which is not indicative of the actual offering price of the Common
Shares) of Cdn. $8.50 per Common Share, equal to approximately U.S. $6.10, the
Company's net tangible book value as of June 30, 1997 would have been $19.4
million, or $1.92 per Common Share (after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company). This
represents an immediate increase in net tangible book value of $1.47 per
Common Share to existing shareholders and an immediate dilution of $4.18 per
Common Share to new investors. The following table illustrates this per share
dilution (in both U.S. and Canadian dollars, based on an assumed exchange rate
of Cdn. $1.3942 per U.S. $1.00):(/1/)
<TABLE>
<CAPTION>
U.S. $ CDN. $
----------- -----------
<S> <C> <C> <C> <C>
Assumed public offering price per Common Share....... $6.10 $8.50
Net tangible book value per share as of
June 30, 1997..................................... $0.45 $0.62
----- -----
Increase in net tangible book value per share
attributable to the offering...................... 1.47 2.05
----- -----
Pro forma net tangible book value per share after
the offering........................................ 1.92 2.67
----- -----
Dilution per share to new investors.................. $4.18 $5.83
===== =====
Percentage dilution in relation to offering price.... 68.5% 68.5%
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the difference between the number of Common Shares purchased from the Company,
the total consideration paid and the average price per Common Share paid by
the existing shareholders and by new public investors purchasing Common Shares
in this offering at an assumed public offering price (which is not indicative
of the actual offering price of the Common Shares) of Cdn. $8.50 per share,
equal to approximately U.S. $6.10 (before deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company).
<TABLE>
<CAPTION>
AVERAGE PRICE
SHARES PURCHASED(/1/) TOTAL CONSIDERATION PER SHARE
------------------------------------------------ -------------
NUMBER PERCENT AMOUNT (U.S. $) PERCENT U.S. $ CDN. $
------------- -------------------------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders... 7,118,173 70.4% $15,729,934 46.2% $2.21 $3.08
New investors........... 3,000,000 29.6 18,300,000 53.8 6.10 8.50
------------- -------- ----------- -----
Total................. 10,118,173 100.0% $34,029,934 100.0%
============= ======== =========== =====
</TABLE>
- --------
(1) The foregoing computations assume no exercise of stock options after June
30, 1997. As of June 30, 1997, there were outstanding options to purchase
713,500 Common Shares, with a weighted average exercise price of $3.72 per
Common Share. In addition, as of June 30, 1997, there were 303,362 Common
Shares reserved for issuance under future option grants under the Company's
Stock Plans, and 602,331 Common Shares issuable upon exercise of
outstanding warrants at an exercise price of $3.00 per Common Share. To the
extent that any shares available for issuance upon exercise of outstanding
options or warrants or reserved for future issuance under the Company's
Stock Plans are issued, there will be further dilution to new public
investors. See "Management--Stock Plans" and "Description of Share
Capital".
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The statement of
operations data for each of the five years in the period ended December 31,
1996, and the balance sheet data as of December 31, 1996 and 1995, are derived
from financial statements of the Company that have been audited by Ernst &
Young LLP, independent auditors, and are included elsewhere in this
Prospectus. The balance sheet data as of December 31, 1994, 1993 and 1992 are
derived from audited financial statements of the Company that are not included
in this Prospectus. The consolidated statement of operations data for the six-
month periods ended June 30, 1997 and 1996 and the balance sheet data as of
June 30, 1997 are derived from unaudited financial statements included
elsewhere in this Prospectus. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's consolidated operating results and financial
position for such periods. The consolidated operating results for the six
months ended June 30, 1997 are not necessarily indicative of the results to be
expected for any other interim period or any future fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The Company has paid no cash dividends.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- ------ -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
License revenue...... $ -- $ -- $ 1,186 $ -- $ -- $1,000 $ 1,712
Revenues from
collaborative
agreements
and other........... 21 384 634 1,990 2,827 3,439 1,212
------- ------- ------- ------- ------- ------ -------
Total revenues..... 21 384 1,820 1,990 2,827 4,439 2,924
Expenses:
License fees......... 50 50 605 100 -- -- --
Research and
development......... 1,315 1,037 2,053 2,888 3,199 4,321 3,539
General and
administrative...... 1,231 740 1,731 1,334 1,125 873 408
------- ------- ------- ------- ------- ------ -------
Total expenses..... 2,596 1,827 4,389 4,322 4,324 5,194 3,947
------- ------- ------- ------- ------- ------ -------
Loss from operations... (2,575) (1,443) (2,569) (2,332) (1,497) (755) (1,023)
Interest income........ 122 45 290 18 48 48 15
Interest expense....... (22) (173) (172) (106) (3) (7) (3)
------- ------- ------- ------- ------- ------ -------
Net loss............... $(2,475) $(1,571) $(2,451) $(2,420) $(1,452) $ (714) $(1,011)
======= ======= ======= ======= ======= ====== =======
Net loss per
share/1/.............. $ (0.35) $ (0.41) $ (0.46) $ (0.77) $ (0.46) $(0.23) $ (0.38)
======= ======= ======= ======= ======= ====== =======
Shares used in
computing net loss
per share/1/.......... 6,975 3,877 5,365 3,149 3,144 3,144 2,688
======= ======= ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------------------------
1997 1996 1995 1994 1993 1992
----------- ------- ------- ------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents........... $ 3,657 $ 5,624 $ 188 $ 329 $ 1,552 $ 929
Working capital
(deficit)............. 2,986 4,438 (3,432) (3,061) (1,570) (729)
Total assets........... 4,250 5,858 433 593 1,967 1,013
Long-term liabilities.. -- -- 2,005 -- -- --
Accumulated deficit.... (11,076) (8,601) (6,150) (3,729) (2,278) (1,564)
Shareholders' equity
(net capital
deficiency)........... 3,181 4,593 (5,226) (2,813) (1,372) (659)
</TABLE>
- --------
/1/ See Note 1 of Notes to Consolidated Financial Statements for an
explanation of shares used in computing net loss per share.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements relating to
future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results and the timing
of certain events could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth under "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company's principal focus is to identify and acquire gastrointestinal
products that have near-term commercial potential and to apply its product
development expertise to commercialize these products. The Company selects
products that it believes serve a gastrointestinal disease in need of new
treatments, have the potential for rapid regulatory approval, and are
marketable to a small group of specialized physicians. Salix believes this
strategy will reduce the expense, time and risk normally associated with
pharmaceutical development. The Company believes that its first two products,
Colazide and rifaximin, will demonstrate the Company's ability to execute this
strategy.
The Company has generated no revenues to date from the sales of products,
and it has been unprofitable since inception. The Company expects to continue
to incur substantial and increasing losses and expects its operating expenses
to increase as the Company commences its Colazide commercialization efforts in
the United Kingdom and, subject to regulatory approval, elsewhere in Europe
and continues its product development and clinical programs for other
products. The Company does not expect to achieve profitability on an annual
basis before 2000. As of June 30, 1997, the Company had accumulated losses of
approximately $11.1 million. Over the five and a half years ended on June 30,
1997, the Company has financed its operations principally through
reimbursement payments, license fees and milestone revenues, totaling
approximately $14.0 million under collaborative research and licensing
agreements, and sales of equity and convertible debt securities totaling
approximately $14.2 million. Over the same period, the Company has recorded
expenses totaling $24.8 million, of which $17.3 million were in research and
development expenses and $0.8 million in license fees to licensors. The
Company's alliances with Astra AB ("Astra") and a division of Menarini
Pharmaceutical Industries s.r.l. ("Menarini") have allowed Salix to fund the
development of Colazide, to in-license other gastrointestinal products, and to
help establish itself with a relatively small amount of outside capital.
The Company's collaborative research and licensing agreements provide for
payments in support of the Company's research activities, as well as
additional payments for licensing fees and upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded when
earned based on contract costs incurred to date compared with total estimated
contract costs. License fees and milestone revenues are recognized according
to contract terms. Amounts received in advance of the applicable research
activities are deferred as unearned revenue. Amounts received which are
refundable until the milestones are achieved are deferred as advances from
licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited ("Biorex")
in exchange for participation in future milestone revenues and profits. The
Company will sell Colazide, the disodium salt of balsalazide, which is
manufactured by third parties under contract with the Company, to its
distribution partners, Astra and Menarini, at a formula price. The Company
received approval in July 1997 to market Colazide in the United Kingdom for
the treatment of acute ulcerative colitis. The commercial launch of Colazide
by Astra in the United Kingdom is expected in October 1997, with launches in
other European countries by Astra and Menarini beginning in 1998, subject to
receipt of necessary regulatory approvals. The Company expects to realize
product revenues from Astra's sales of Colazide in 1997 and sales of
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Colazide by Menarini in 1998. The selling price of Colazide to Astra outside
the United Kingdom has not been determined, and the Company will be obligated
to pay to Biorex, the original licensor of the product, a portion of any gross
profit on Colazide sales to Astra and Menarini outside the United States. In
addition, the Company anticipates high initial product launch costs due to the
cost of scaling up manufacturing processes for commercial distribution.
The Company's second product, rifaximin, is currently under development. The
Company obtained the rights to develop, make, use and sell rifaximin in Canada
and the United States from Alfa Wassermann S.p.A. ("Alfa Wassermann") in
exchange for future royalties and milestone payments. Under a separate
agreement, Alfa Wassermann will supply Salix with bulk active ingredient
rifaximin at a fixed price. If regulatory approvals are obtained, the Company
intends to establish its own direct sales force to market rifaximin. This
strategy for rifaximin represents the business model that the Company intends
to adopt for future product development and commercialization. Although the
creation of an independent sales organization will require a substantial
investment by the Company, the Company anticipates that the financial results
from rifaximin and future products will be more favorable to the Company than
those anticipated from the sale of Colazide by Astra and Menarini since the
Company has retained the distribution rights to rifaximin, whereas Astra and
Menarini have the distribution rights for Colazide. In the case of Colazide,
the Company granted exclusive distribution rights in certain territories in
exchange for funding needed to complete late-stage development of Colazide, to
in-license other gastrointestinal products and to help establish the Company
as a viable gastrointestinal pharmaceutical company.
The Company intends to pursue regulatory approvals for two initial
indications for rifaximin, hepatic encephalopathy and antibiotic associated
colitis. The Company believes that an NDA will not be filed for rifaximin for
the hepatic encephalopathy indication prior to mid-1998 and that FDA approval
would not be obtained for at least one year after filing, if at all. The
filing of an NDA for rifaximin for the antibiotic associated colitis
indication is not expected to occur until at least 1999. The Company plans
further development of rifaximin for several other possible indications. The
Company plans to submit an application to the FDA seeking Orphan Drug Status
for rifaximin to treat hepatic encephalopathy. Orphan Drug Status, if granted,
can entail certain possible advantages in the testing and approval process for
the drug. See "Business--Products Under Development" and "Business--Government
Regulation". Should rifaximin be designated Orphan Drug Status, costs incurred
through submission of an NDA for the hepatic encephalopathy indication may be
expected to be significantly reduced. Salix also intends to begin clinical
trials using rifaximin to treat antibiotic associated colitis later this year
with the full costs to be borne by Salix.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 and 1996
Because certain clinical trials for Colazide were completed in 1996, product
development revenues for the six months ended June 30, 1997 were minimal.
Revenues for the six months ended June 30, 1996 were comprised primarily of
revenue recognized from collaborative agreements for product development of
Colazide.
Operating expenses were $2.6 million and $1.8 million for the six months
ended June 30, 1997 and 1996, respectively. The increase in operating expenses
is due to increases of $0.3 million in research and development expenses and
$0.5 million in general and administrative expenses. The increase in research
and development expenses is due primarily to increased regulatory affairs
activities for the preparation of the NDA filing in the United States. The
increase in general and administrative expenses of $0.5 million is due mainly
to the addition of key personnel and the increased administrative costs
related to becoming a public company in Canada.
Interest expense decreased from $173,000 to $22,000, and interest income
increased from $45,000 to $122,000 due primarily to interest income derived
from the Company's initial public offering in Canada and the conversion of
outstanding debentures as a result of the public offering.
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The Company incurred net losses of $2.5 million and $1.6 million for the six
months ended June 30, 1997 and 1996, respectively.
Years Ended December 31, 1996, 1995, and 1994
Revenues totaled $1.8 million, $2.0 million and $2.8 million for 1996, 1995
and 1994, respectively. For 1996, license revenues were $1.2 million and
revenue from collaborative agreements for product development was $0.6
million. In 1996 revenues from collaborative agreements for product
development decreased as certain clinical trials for Colazide were completed.
Revenues in 1994 and 1995 were comprised primarily of revenue recognized from
collaborative agreements for product development. The decline in revenues over
the three fiscal periods corresponds to the reductions in the level of the
clinical trial efforts in the United States and Europe.
License fee expenses in 1996 of $0.6 million relate primarily to payments
made to Biorex under the terms of the Colazide license agreement.
Research and development expenses through 1996 are primarily for clinical
trials and both domestic and foreign regulatory affairs activities related to
the development of Colazide. Research and development expenditures were $2.1
million, $2.9 million and $3.2 million for 1996, 1995 and 1994, respectively.
The decrease in research and development expenses of $0.8 million from 1995 to
1996 is due to the completion of certain clinical trials for Colazide in 1996,
partially offset by increased regulatory affairs activities for the
preparation of the NDA filing in the United States. The $0.3 million decrease
in research and development expenditures from 1994 to 1995 relates to
decreased regulatory affairs activities, as the Company had filed a marketing
authorization application in the United Kingdom in early 1995, which
expenditures were partially offset by increased clinical trial expenses
associated with the United States development efforts.
General and administrative expenses were $1.7 million, $1.3 million and $1.1
million for 1996, 1995 and 1994, respectively. The increase of $0.4 million in
1996 from 1995 was due mainly to the addition of key personnel throughout the
year and the increased administrative costs related to being a public company.
The $0.2 million increase in 1995 from 1994 was comprised of personnel-related
expenses and professional fees related to corporate development activities.
The Company has experienced net losses of $2.5 million, $2.4 million and
$1.5 million for 1996, 1995 and 1994, respectively.
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $5.6 million for United States income tax purposes. These
carryforwards will expire in varying amounts through 2011. As the Company adds
new investors, utilization of the current loss carryforwards may be limited
if, under United States Internal Revenue Code Section 382, a change in
ownership is deemed to have occurred within the three most recent fiscal
years.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed product development, operations
and capital expenditures primarily from funding arrangements with
collaborative partners and from public and private sales of debt and equity
securities.
As of June 30, 1997, the Company had approximately $3.7 million in cash and
cash equivalents. The decrease of $1.9 million from December 31, 1996 was due
primarily to cash used in operating activities of $3.0 million partially
offset by cash provided by financing activities of $1.1 million from issuance
of Common Shares upon exercise of warrants. Capital expenditures for the
remainder of 1997 are not expected to be material.
As of June 30, 1997, the Company had no long term obligations. The Company
has non-cancelable purchase order commitments for inventory purchases of $0.4
million.
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The Company's purchases of raw materials are, and its future product sales
to its European distribution partners will be, denominated in Pounds Sterling.
Translation into the Company's reporting currency, the United States dollar,
has not historically had a material impact on the Company's financial
position. Additionally, the Company's net assets denominated in currencies
other than the functional currency have not exposed the Company to material
risk associated with fluctuations in currency rates. Given these facts, the
Company has not considered it necessary to use foreign currency contracts or
other derivative instruments to manage changes in currency rates.
The Company has sustained continuing operating losses and expects to incur
substantial and increasing losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes that the anticipated net proceeds from this offering,
together with the Company's existing cash reserves and cash flow from
operations, should be sufficient to satisfy the cash requirements of the
Company's product development programs through at least 1998. The Company's
actual cash requirements may vary materially from those now planned because of
a number of factors, including the results of research and development
activities, FDA and foreign regulatory processes, establishment of and changes
in relationships with strategic partners, technological advances by the
Company and other pharmaceutical companies, the terms of the Company's
collaboration arrangements with strategic partners, and the status of
competitive products. The Company anticipates that it will need to raise
additional funds in the form of debt or equity financing to fund future
licensing, development, and commercialization of new products. The Company may
also enter into collaborative arrangements with corporate partners that could
provide the Company with additional funding in the form of equity, debt,
licensing, milestone and/or royalty payments. There can be no assurance that
the Company will be able to enter into such arrangements or raise any
additional funds on terms favorable to the Company.
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BUSINESS
The following Business section contains forward-looking statements relating
to future events or the future financial performance of the Company, which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus.
OVERVIEW
The Company identifies and in-licenses gastrointestinal products that have
near-term commercial potential and applies its product development expertise
to accelerate the commercialization of these products. The Company's business
strategy is to select and in-license gastrointestinal products that have the
potential for rapid regulatory approval. By in-licensing drugs with late-stage
clinical data and developing these drugs for diseases that are in need of new
pharmaceutical treatments, the Company believes that it can significantly
reduce the risk, time and investment normally associated with the development
and commercialization of pharmaceuticals products.
The Company's first product, Colazide, recently was approved for marketing
in the United Kingdom for the treatment of acute ulcerative colitis. The
Company currently expects that commercial launch of Colazide in the United
Kingdom will occur in October 1997 and, subject to regulatory approvals, that
Colazide will become commercially available in other countries in Europe in
1998. In addition, the Company's New Drug Application ("NDA") for Colazide for
the same indication was recently accepted for filing by the United States Food
and Drug Administration ("FDA").
The Company has also in-licensed a second product, rifaximin, and intends to
pursue regulatory approvals for the drug in the treatment of two initial
indications, hepatic encephalopathy and antibiotic associated colitis. The
Company presently expects to submit an application to the FDA in the fourth
quarter of 1997 seeking Orphan Drug Status for rifaximin for the treatment of
hepatic encephalopathy. If the Company's application is approved, rifaximin
could receive priority review from the FDA following completion of clinical
trials for the drug and filing of an NDA for marketing approval. It is not
currently expected that the Company will be in a position to file an NDA for
rifaximin prior to mid-1998.
In the course of its transition to a commercial stage company, the Company
has leveraged its resources by establishing strategic alliances with companies
that have significant resources in clinical monitoring and manufacturing. In
anticipation of the commercial release of Colazide in the United Kingdom in
October 1997, the Company has entered into manufacturing arrangements with
Courtaulds Chemicals (Holdings) Limited and Anabolic, Inc., each of which is a
commercially established pharmaceutical manufacturer.
Colazide will be distributed in all markets except certain countries in
southern Europe and Asia by Astra AB ("Astra"), a Swedish international
pharmaceutical company, under a distribution agreement that provides Astra
with exclusive distribution rights, and in Italy, Spain, Portugal, and Greece
by a division of Menarini Pharmaceutical Industries s.r.l. ("Menarini"), an
Italian manufacturer and distributor of pharmaceutical products. The Company's
distribution arrangements with Astra and Menarini have provided the Company
with funding necessary to complete the late-stage development of Colazide, in-
license other gastrointestinal products and help establish the Company as a
viable gastrointestinal pharmaceutical company.
The Company expects to market and sell rifaximin and other future products
in-licensed and commercialized by the Company through a small, specialized
direct sales force to be established by Salix. The Company believes that a
direct sales model will reflect higher operating margins than the distribution
partner model that the Company will use in connection with sales of Colazide.
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The Company was incorporated in the British Virgin Islands in December 1993.
Prior to December 1993, the business of the Company was conducted by Salix
Pharmaceuticals, Inc., a California corporation ("Salix Pharmaceuticals"),
which was incorporated in California in 1989, and Glycyx Pharmaceuticals,
Ltd., a Bermuda corporation ("Glycyx"), each of which is now a subsidiary of
Salix Holdings, Ltd. Unless the context otherwise requires, references in this
Prospectus to "Salix" and the "Company" refer to Salix Holdings, Ltd., a
corporation organized under the laws of the British Virgin Islands, and its
wholly owned subsidiaries, Salix Pharmaceuticals and Glycyx. The Company's
executive offices are located at 3600 West Bayshore Road, Suite 205, Palo
Alto, California 94303, and its telephone number at that address is (650) 856-
1550.
DISEASE BACKGROUND
Gastrointestinal Disease Overview
Gastrointestinal diseases have a major impact in the United States and
across the world. According to the National Institutes of Health, more than 60
million cases of gastrointestinal disease are reported annually in the United
States alone, resulting in more than 200 million days of restricted activity,
50 million visits to physicians, 10 million hospitalizations, and nearly
200,000 deaths. Current treatments for gastrointestinal disease in many
instances either have serious side effects or provide only partial symptomatic
relief. The Company believes there is significant need for new pharmaceutical
therapies to improve treatment of gastrointestinal diseases.
The Company is pursuing product indications for select gastrointestinal
conditions, including ulcerative colitis, hepatic encephalopathy, antibiotic
associated colitis, colonic polyps, familial adenomatous polyposis,
diverticular disease of the colon, infectious diarrhea, and ulcers.
Inflammatory Bowel Disease/Ulcerative Colitis
Inflammatory bowel disease ("IBD") is a condition that covers both
ulcerative colitis and Crohn's disease. The cause of IBD is unknown and onset
can occur at any age but is most prevalent between the ages of 15 and 25. The
symptoms of ulcerative colitis and Crohn's disease are similar, but ulcerative
colitis affects the large colon while Crohn's disease can affect any part of
the gastrointestinal tract. These debilitating diseases are usually lifelong,
and there is currently no cure.
The Crohn's and Colitis Foundation of America estimates that IBD afflicts
two million people in the United States. Sales of drugs used to treat IBD
worldwide totaled approximately $550 million in 1996 and have reflected a
compound annual growth rate of approximately 20% between 1987 and 1996.
Ulcerative colitis is a chronic disease which causes ulceration of the inner
lining of the colon and rectum. Symptoms include diarrhea, abdominal pain,
rectal bleeding and fever. Decreased appetite and weight loss are also common.
As with many chronic illnesses, ulcerative colitis also can have serious
emotional side effects, including depression, anxiety and reduced self-esteem,
typically resulting from the painful and embarrassing symptoms caused by the
disease.
Medical treatment of ulcerative colitis over the past 50 years has generally
consisted of corticosteroids, which are typically unsuitable for long-term
treatment because of their significant side effects, and 5-aminosalicylic-acid
("5-ASA") drugs. To be effective, these drugs must travel through the stomach
and small intestine to the colon and be released in the colon without
significant quantities being absorbed in the bloodstream. Sulfasalazine
("SASP"), which is taken orally, is the original 5-ASA drug and is considered
the current "gold standard" treatment (i.e., the most effective available
treatment). SASP is effective in reaching the colon with only low absorption
rates in the bloodstream. However, SASP also contains a carrier molecule
(sulfapyridine) which is toxic and results in a high incidence of side effects
such as nausea, headache, dizziness, anemia or other blood disorders, and skin
rashes. In approximately
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30% of IBD patients who attempt treatment with SASP, these side effects are so
severe that the patient cannot tolerate continued treatment.
In the early 1980s, pharmaceutical companies began developing new drugs
designed to deliver 5-ASA to the colon without the side effect profile of
SASP, and these drugs, including mesalamine, first appeared in the United
States market in the early 1990s. While the new drugs are generally better
tolerated than SASP, they continue to be limited in use because significant
amounts of the drugs may be absorbed in the bloodstream before reaching the
colon. In other cases, the drugs may not dissolve in the body, in which case
they may remain whole when passed through the bowel and are, therefore, not
absorbed in the colon. One of these drugs is mesalamine, the current market
leader when measured by sales of drugs to treat IBD.
An alternative treatment for ulcerative colitis where drug intervention is
ineffective is surgical removal of the large bowel. This procedure effectively
eliminates ulcerative colitis but with substantial physical and emotional
consequences for the patient, who must carry an external bag or have an
internal pouch constructed to collect waste.
Hepatic Encephalopathy
Hepatic encephalopathy, a neuropsychiatric syndrome caused by the build-up
of toxic products, such as ammonia, in the bloodstream, is a common
complication of acute or chronic liver disease. Causes of liver disease
include alcohol abuse and hepatitis due to viruses, drug abuse or toxins. The
liver plays a key role in removing certain toxins found in the digestive tract
from the blood. In severe liver disease, the liver does not effectively remove
ammonia from the blood. As a result, ammonia accumulates in the bloodstream
and travels to the brain, potentially causing personality changes, impaired
consciousness, agitation or mania, and coma. Hepatic encephalopathy affects
approximately 160,000 people in North America. Approximately 30% of hepatic
encephalopathy patients go into coma, which is fatal in up to 80% of these
patients, despite aggressive intervention.
To date, no product has been approved in North America to treat hepatic
encephalopathy. Existing non-approved treatment strategies, including
antibiotics, focus on reducing levels of ammonia in the bloodstream. The
Company believes that current antibiotic therapies, including neomycin and
metronidazole, are inadequate treatments, however, due to their limited
antibacterial spectrum and side effects. Oral lactulose is also used to reduce
the amount of ammonia accumulated in the intestine by increasing the number of
bowel movements per day.
In spite of the small number of people afflicted with hepatic
encephalopathy, the Company believes that a significant market opportunity
exists for a drug that offers a more effective therapy than currently
available treatments. In addition, because hepatic encephalopathy affects a
relatively small number of patients, the Company believes the FDA will permit
drugs that treat hepatic encephalopathy to qualify for Orphan Drug Status. In
practice, Orphan Drug Status is available for therapies addressing indications
affecting less than 200,000 people, may allow the drug to receive a priority
review by the FDA, provides the product seven years of market exclusivity for
the orphan indication regardless of the drug's patent status, and may allow
the FDA to rely only on a single pivotal trial in approving an NDA. See "--
Government Regulation".
Antibiotic Associated Colitis
Antibiotic associated colitis ("AAC") can be caused by taking certain
antibiotics to treat a variety of illnesses. These antibiotics can cause a
reduction in the presence of normal bacteria in the colon, a condition which
promotes overgrowth of the bacterium Clostridium difficile ("C. difficile").
C. difficile produces toxins that cause severe diarrhea and inflammation of
the colon. If untreated, these symptoms can lead to toxic megacolon, colonic
perforation and death. Institutionalized patients, such as patients in
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nursing homes, have a high risk of developing AAC. Independent research
indicates that up to 2,000,000 people develop AAC each year in North America.
Until recently, oral vancomycin was the preferred treatment for AAC.
However, the widespread use of vancomycin for treating enterococcal infections
has resulted in the development of vancomycin-resistant organisms (organisms
that do not respond to vancomycin therapy). Vancomycin resistant genes may
also be transferred to other microorganisms such as Staphylococcus aureus, an
organism responsible for many common infections. The emergence of these
resistant organisms has led the United States Centers for Disease Control and
Prevention to recommend that vancomycin be used for treatment of AAC only in
cases which fail to respond to metronidazole therapy or are severe and
potentially life-threatening.
Metronidazole, although not approved for AAC, is now the preferred treatment
for AAC. Although metronidazole is less costly than vancomycin, the drug is
absorbed not only in the digestive tract but also in the bloodstream following
drug administration. In addition, the safety and effectiveness of
metronidazole in treating AAC has not been confirmed by the FDA through the
NDA clearance process.
Colorectal Cancer/Colonic Polyp
A polyp is a growth that projects, often on a stalk, from the interior
lining of the intestine or rectum. Approximately 30% of individuals in Western
countries have polyps. Based on population indices, this equates to
approximately 80 million persons in the United States and 95 million in
Europe. In addition, the probability of having polyps increases with age. One-
half to two-thirds of individuals over 65 in Western countries have polyps.
When a polyp is diagnosed, it is normally removed surgically through a
procedure known as polypectomy. Polyp recurrence rates following polypectomy
average 45% after 24 months. Currently, no proven pharmaceutical treatment is
available for the common polyp patient.
All colorectal cancer starts as a polyp. Conversion of benign polyps to
neoplastic or metaplastic tissue (cancer) occurs in approximately five percent
of polyp patients. Colorectal cancer includes cancer of the colon and rectum
and is the third most common cancer in men and the fourth most common cancer
in women. Cancers of the colon and rectum may be present for as long as five
years before symptoms appear. Common symptoms include rectal bleeding, anemia,
constipation, abdominal pain, diarrhea, weight loss and fatigue. Patients with
diagnosed colon cancer have a five year survival rate of less than 50%.
Current standard treatment includes surgical removal of the colon combined
with chemotherapy. This treatment regimen has helped improve survival rates
for early and mid-stage cancers but not for late stage, invasive cancers.
The Company believes that managing polyp recurrence will help decrease the
incidence of polyp progression to colorectal cancer.
Familial Adenomatous Polyposis
Familial Adenomatous Polyposis ("FAP") is a hereditary condition that
predisposes patients to a large number of colonic polyps. Studies estimate
that approximately 40,000 people in the United States have the genetic
abnormality that causes FAP. Colorectal cancer is considered an inevitable
consequence in patients with FAP, and most FAP patients develop colorectal
cancer by age 40. Due to the small number of patients with FAP, drugs to treat
FAP may be eligible for Orphan Drug Status by the FDA.
Diverticular Disease of the Colon
Diverticular disease of the colon results from an acquired deformity of the
colon (diverticulosis) that leads to subsequent complications. The deformity
results in a build-up of fecal matter in the colon, which causes symptoms such
as pain and fever. If not treated, these symptoms can progress and result in
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additional complications such as intra-abdominal abscess, bowel obstruction
and possible bowel perforation. Because this fecal build-up contains entrapped
bacteria, it creates an environment susceptible to infection, suggesting that
this symptom of diverticulosis can be treated with antibiotic therapy. The
disease is common in Western societies, afflicting more than 25 million people
in the United States and more than 35 million people in Western Europe. Of
those people affected by diverticular disease, approximately 20% will develop
symptoms that require therapy.
Infectious Diarrhea
Diarrhea is a leading cause of death in most developing countries, with the
greatest impact seen in infants and children. In the United States, children
under 5 years of age average two episodes of diarrhea per year. In developing
countries, the rate is two to three times higher. Overall, physicians in the
United States are consulted annually for 8.2 million diarrhea episodes.
Primary therapy for infectious diarrhea is antibiotics, with the choice of
antibiotic made on the basis of effectiveness against the specific bacterial
cause in each case or in similar local cases. Antibiotic development in recent
years has tended to focus on broad spectrum antibiotics to cover the widest
possible range of bacterial forms. As new bacterial forms mutate and develop
resistance to currently available antibiotics, there is ongoing effort to
develop more effective antibiotic therapies.
Ulcers
Peptic ulcer is a chronic inflammatory condition of the stomach and small
intestine. The bacterium Helicobacter pylori ("H. pylori") is considered to be
the underlying cause of most peptic ulcers, suggesting that antibiotics could
be used to treat infected ulcer patients. It is estimated that at least half
of the world's population and 25% of people in the United States are infected
with the H. pylori organism. Studies have shown that eradication of H. pylori
may reduce the rate of ulcer recurrence.
BUSINESS STRATEGY
The Company's objective is to become a leading gastrointestinal
pharmaceutical company. The Company believes that by implementing the
strategies summarized below it will reduce significantly the risk, time and
investment normally associated with development and commercialization of
pharmaceuticals.
In-license proprietary gastrointestinal products with near-term commercial
potential. The Company's principal focus is to identify and in-license
gastrointestinal products that have near-term commercial potential, and to
apply its product development expertise to commercialize these products. In
pursuing this strategy, the Company evaluates each product based on the
following:
. The product must treat gastrointestinal diseases that are in need of new
pharmaceutical therapies. The Company believes the gastrointestinal disease
market is in need of new or more effective pharmaceutical treatments and
will provide the Company with a significant return on investment. The
Company also believes that by establishing itself as a recognized leader in
the gastrointestinal disease market, it will enhance its ability to attract
future in-licensing product opportunities.
. The product must have a substantial base of positive late-stage clinical
research data in humans and have the potential for rapid regulatory
approval. The Company will carefully evaluate and in-license only products
that have an existing base of positive late-stage data in humans and that
the Company believes demonstrate safety and efficacy. By in-licensing drugs
with a substantial base of late-stage clinical data and developing these
drugs for diseases that are in need of new or more effective pharmaceutical
treatments, the Company believes that it will be able to minimize the costs
and risk associated with inventing a drug and conducting early-stage
clinical trials needed to
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determine if a drug is safe and effective in humans. The Company also
believes that its strategy can significantly reduce the time and risk of
obtaining regulatory clearances.
. The product must be available to the Company on acceptable licensing
terms. The Company believes that there are significant opportunities to in-
license or acquire gastrointestinal products from pharmaceutical companies
in the United States and internationally. This includes products developed
by companies that lack either the expertise or resources to pursue
regulatory approvals in the United States and certain other territories. In
addition, the Company believes that large pharmaceutical companies are
willing to out-license or sell products and technologies that do not fit
their product portfolios or fail to meet their business or market criteria.
Establish a small, specialized sales force to market to a targeted group of
physicians. Of the 738,000 physicians in the United States, gastrointestinal
diseases are treated primarily by approximately 9,700 gastroenterologists. The
Company believes that it can effectively reach this small number of physicians
through a small, specialized sales and marketing group, without the investment
needed to develop and maintain the large sales force typically required in the
pharmaceutical industry. This direct sales force model will be the basis for
the Company's commercialization of rifaximin and future products in the United
States. The Company expects that, once fully established and operational, a
sales and marketing model premised on a domestic direct sales force will
result in higher operating margins than the distribution partner model that
the Company has established for Colazide sales. See "--Marketing and Sales".
In the case of Colazide, the alliances with Astra and Menarini have provided
the Company funding needed to complete late-stage development of Colazide, to
in-license other gastrointestinal products and to help establish the Company
as a viable gastrointestinal pharmaceutical company. The Company received the
necessary funding in exchange for the grant of exclusive distribution rights
in certain territories to Astra and Menarini. The Company plans to implement
future North American product sales and marketing based on the direct sales
force model. See "--Strategic Alliances".
Enhance market potential of products through development of additional
indications. Where appropriate, the Company intends to conduct clinical trials
for multiple indications to expand the approved use of its products. The
Company believes that both balsalazide and rifaximin have potential
applications in other disease indications which, if developed by the Company
and approved by regulatory authorities, will significantly enhance the
commercial potential of such products. In the case of Colazide, which has been
approved in the United Kingdom for the treatment of acute ulcerative colitis
and for which the Company has filed an NDA with the FDA for the same
indication, the Company believes that balsalazide, the active ingredient in
Colazide, may also have therapeutic applications for reduction of colonic
polyps. Similarly, rifaximin may be developed in the future for potential use
in treating infectious diarrhea, diverticular disease and other
gastrointestinal diseases. Currently, Alfa Wassermann, one of the Company's
partners, is conducting a Phase III clinical trial in Spain relating to
rifaximin as a therapy for hepatic encephalopathy, and the Company expects to
commence Phase II/III clinical trials in the United States for rifaximin as a
treatment for AAC in the fourth quarter of 1997. The Company believes that the
strategy of commercializing products for initial indications will enable it to
begin realizing product revenues while completing the development of multiple
indications. See "--Products Under Development".
Enhance research and manufacturing capabilities through strategic
partnerships. The Company has established strategic relationships with
companies it believes have proven expertise in clinical monitoring and
manufacturing. The Company uses clinical research organizations ("CROs") to
manage its clinical trials, thus enabling the Company to reduce its fixed
overhead costs and to leverage its management resources. In anticipation of
the commercial release of Colazide in the United Kingdom in October 1997, the
Company has entered into pharmaceutical manufacturing arrangements with
Courtaulds Chemical (Holdings) Limited for bulk drug substance and Anabolic,
Inc. for finished dosage forms. See "--Manufacturing".
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PRODUCTS UNDER DEVELOPMENT
The Company's principal focus is on gastrointestinal products with late-
stage clinical data on human safety and efficacy. The following table
summarizes Salix's current products in development.
<TABLE>
<CAPTION>
PRODUCT INDICATION STATUS
- -------------------------------------------------------------------------------
<C> <C> <S>
. Approved in United Kingdom in
Colazide/1/ Acute ulcerative colitis July 1997
. NDA accepted for filing by FDA
in United States in August
1997
. European submissions to occur
through mutual recognition
procedure of European Union in
1997 and 1998
. Additional Phase III/IV
clinical study scheduled to
commence in the fourth quarter
of 1997
- -------------------------------------------------------------------------------
. European clinical studies
Colazide/1/ Ulcerative colitis maintenance ongoing
- -------------------------------------------------------------------------------
. Phase III clinical trial
Rifaximin Hepatic encephalopathy ongoing/2/
. Orphan drug application to be
submitted in the fourth
quarter of 1997 as supplement
to IND
- -------------------------------------------------------------------------------
Rifaximin Antibiotic associated colitis . IND submitted in April 1997
. Phase II/III clinical trials
scheduled to commence in the
fourth quarter of 1997
- -------------------------------------------------------------------------------
Rifaximin H. pylori . IND planned for later date
- -------------------------------------------------------------------------------
Rifaximin Diverticulitis . IND planned for later date
- -------------------------------------------------------------------------------
Rifaximin Infectious diarrhea . IND planned for later date
- -------------------------------------------------------------------------------
BX-661A Familial adenomatous polyposis . Orphan Drug Status application
to be submitted in 1998
. IND filing and Phase II/III
clinical trials planned in
1998
- -------------------------------------------------------------------------------
BX-661C Colonic polyp reduction . Pre-clinical development
- -------------------------------------------------------------------------------
</TABLE>
/1/ Astra has exclusive commercial rights in all countries excluding Italy,
Spain, Portugal, Greece, Japan, Taiwan, and Korea. Menarini has
exclusive commercial rights in Italy, Spain, Portugal and Greece. See
"--Strategic Alliances" and "--Marketing and Sales".
/2/ This trial is being conducted by Alfa Wassermann in Spain. The data
obtained in this trial may be used in partial support of an NDA filing,
subject to the Company's audit of the clinical protocols, data
collection procedures and methodology established by Alfa Wassermann as
well as the outcome of the trial.
Colazide
Colazide (balsalazide disodium) is an orally administered, anti-inflammatory
drug designed to act in the gastrointestinal tract and specifically in the
colon. The Company recently obtained authorization to market Colazide in the
United Kingdom for the treatment of acute ulcerative colitis. The Company
believes that Colazide is also a potential treatment for large bowel Crohn's
disease and other inflammatory bowel disease conditions. Salix licensed
Colazide from Biorex and will sell Colazide, manufactured by third parties
under contract with the Company, to its distribution partners, Astra and
Menarini. Astra has announced that Colazide will be one of its major product
launches in 1997. Sales of drugs used to treat
35
<PAGE>
IBD worldwide totaled approximately $550 million in 1996 and have reflected a
compound annual growth rate of approximately 20% between 1987 and 1996. See
"--Strategic Alliances".
Colazide was developed after careful evaluation of the benefits and side
effects of existing therapies. Colazide is an orally administered drug therapy
that the Company believes is superior in delivering drug directly to the
colon. Medical treatment of ulcerative colitis over the past 50 years has
consisted of corticosteroids, which are typically unsuited for long-term
treatments because of their significant side effect profile, and 5-ASA drugs.
To be effective, these drugs must travel through the stomach and small
intestine to the colon and be released in the colon without significant
quantities being absorbed in the bloodstream. SASP, which is taken orally, is
the original 5-ASA drug and is effective in reaching the colon with only low
absorption rates in the bloodstream. However, SASP also contains a carrier
molecule (sulfapyridine) which is toxic and results in a high incidence of
side effects such as nausea, headache, dizziness, anemia or other blood
disorders, and skin rashes. In approximately 30% of IBD patients who attempt
treatment with SASP, these side effects are so severe that the patient cannot
tolerate continued treatment.
In the early 1980s, pharmaceutical companies began developing new drugs to
deliver 5-ASA to the colon without the side effect profile of SASP. These
drugs first appeared in the United States market in the early 1990s. While the
new drugs, including mesalamine, are generally better tolerated than SASP,
they continue to be limited in use because significant amounts of the drugs
may be absorbed in the bloodstream before reaching the colon. In other cases,
the drugs may not dissolve in the body, in which case they may remain whole
when passed through the bowel and are therefore not absorbed in the colon. See
"--Inflammatory Bowel Disease/Ulcerative Colitis".
Colazide is a new chemical entity that consists of two molecular structures.
The first molecule, 5-ASA, is the active drug and responsible for the actual
therapeutic effect. The second molecule, 4-ABA, is a non-toxic carrier
molecule that enables the 5-ASA molecule to travel to the colon without being
absorbed in the bloodstream. The combination of these two molecules into one
chemical compound is designed to deliver the therapeutic agent to the disease
site and has a favorable side effect profile.
In June 1997, the Company submitted an NDA to the FDA seeking approval in
the United States for Colazide as a treatment for acute ulcerative colitis. In
July 1997, the Company received marketing authorization in the United Kingdom
for acute ulcerative colitis from the Medicines Control Agency (the "MCA").
Under new mutual recognition procedures of the European Union, the Company's
marketing partners, Astra and Menarini, have informed the Company that they
will file submissions during 1997 and 1998, based on the MCA authorization,
seeking marketing approval for Colazide in Germany, France, Italy, Spain and
certain other member countries of the European Union. The Company believes
that approvals through these mutual recognition procedures will be received
beginning in 1998.
In August 1997, the FDA accepted the NDA for filing. This NDA can be
approved only if the FDA determines that the NDA contains substantial evidence
from clinical trials that the drug is safe and effective for its intended use.
The Company submitted the NDA following completion of five double-blind,
randomized, controlled, safety and efficacy studies evaluating Colazide as a
treatment for acute ulcerative colitis. Two pivotal Phase III studies were
completed in March 1995 and March 1996, respectively.
The multi-center Phase III study conducted in the United States, which
evaluated 150 recently relapsed patients with long-standing disease symptoms,
was completed in March 1996. The proposed marketing dose (6.75 grams per day)
of Colazide was compared to a lower dose of Colazide (2.25 grams per day) and
to mesalamine over an eight week treatment period. The study demonstrated a
statistically significant dose-response between the two Colazide doses for the
primary endpoint of symptom improvement, including stool frequency, rectal
bleeding, sigmoidoscopic score and physician's global assessment. Although the
primary measure of symptom improvement was not statistically significantly
36
<PAGE>
different between Colazide and mesalamine, symptom improvement was noticeably
favorable for Colazide. Secondary measures of study-end symptom scores were
also significantly more favorable for Colazide than mesalamine with respect to
rectal bleeding, sigmoidoscopic score and physician's global assessment.
A trial completed in March 1995 evaluated 100 patients, most of whom had been
recently diagnosed with acute ulcerative colitis, over a 12 week treatment
period at multiple centers in the United Kingdom. The primary study endpoint
measured patient tolerance of Colazide versus mesalamine. While only one
patient in each group withdrew due to intolerance, patients treated with
Colazide had statistically significantly fewer side effects than those treated
with mesalamine. The secondary endpoint of the trial measured the efficacy of
Colazide relative to mesalamine and included primary measures of complete
remission, symptomatic remission, and median time to complete relief of
symptoms. Colazide proved statistically significantly more effective than
mesalamine for the endpoints of complete remission, symptomatic remission, and
median time to complete relief of symptoms.
In addition to the two pivotal Phase III trials, the Company completed
another trial in February 1996, comparing two doses of Colazide to placebo and
evaluating 180 patients at multiple centers in the United States. Due to
ethical concerns regarding treatment of active-disease patients with placebo,
the Company limited the study to four weeks, which reduced the opportunity for
Colazide to demonstrate its full therapeutic effect and no significant
difference between placebo and Colazide for the primary efficacy endpoint was
found. However, patients treated with Colazide showed statistically
significantly fewer side effects than patients treated with placebo. In
addition, the Company believes the lack of difference in efficacy between the
two treatments is attributable to the nature of the patients enrolled and the
short duration of the trial. Many of the patients enrolled had previously
failed treatment with other therapies, including 5-ASA containing products such
as mesalamine.
The Company and its distribution partners are planning to conduct a Phase
III/IV clinical study of Colazide in the treatment of acute ulcerative colitis,
which is scheduled to begin in the fourth quarter of 1997.
Rifaximin
Rifaximin, a new antibiotic, belongs to the rifamycin class of antibiotics
and distinguishes itself from others of analogous structure due to its almost
complete lack of absorption by gastroenteric mucosa, which allows high
concentrations of the active drug to reach and be maintained in the digestive
tract. The Company licensed rights in the United States and Canada to rifaximin
from Alfa Wassermann, which developed and currently markets the product in
Italy for hepatic encephalopathy and chronic intestinal infections as well as
for prophylactic use with infective complications of gastrointestinal surgery.
The Company currently has full commercial rights for rifaximin for the
treatment of gastrointestinal and respiratory tract diseases in the United
States and Canada and intends to establish an independent sales and marketing
organization for the purpose of fully exploiting these rights. The Company
believes that a business model premised on a direct sales force will result in
higher operating margins than the distribution partner model that the Company
has established for Colazide.
The Company intends to pursue regulatory approvals for rifaximin for two
initial indications, hepatic encephalopathy and AAC. In the future, the Company
plans to develop rifaximin for other potential indications, including
infectious diarrhea, diverticular disease, peptic ulcer treatment through H.
pylori eradication, other gastrointestinal infections, and for perioperative
prophylaxis of septic complications of large bowel surgery.
Hepatic encephalopathy is a neuro-psychiatric syndrome caused by the build-up
of ammonia in the blood. When ammonia is not removed from the body, it travels
to the brain and causes the neuropsychiatric syndrome known as hepatic
encephalopathy. The Company believes that antibiotic treatment for hepatic
encephalopathy may prevent the accumulation of ammonia in the bloodstream.
37
<PAGE>
The Company plans to submit an application to the FDA in the fourth quarter
of 1997 seeking Orphan Drug Status for rifaximin to treat hepatic
encephalopathy. Orphan drug status is generally available for indications
affecting less than 200,000 patients. In practice, it may allow an NDA to
receive a priority review by the FDA, gives the product seven years of market
exclusivity for the orphan indication regardless of the drug's patent status,
and may allow the FDA to permit approval of an NDA based on a single pivotal
Phase III trial. See "--Government Regulation". The Company believes that
approximately 160,000 persons currently suffer from hepatic encephalopathy in
North America.
As part of its agreement with Alfa Wassermann, the Company obtained clinical
trial data for rifaximin. In addition to previous studies, Alfa Wassermann is
currently conducting a study in Spain which may provide the Company with data
in support of an NDA filing in the United States for hepatic encephalopathy.
The validity of this data is subject to the Company's audit of the clinical
protocol, data collection procedures and methodology established by Alfa
Wassermann in conducting this study. Previous studies in patients with hepatic
encephalopathy include open-label trials and randomized, double-blind,
comparative trials in patients with hepatic encephalopathy. In these studies,
a total of 237 patients were treated with rifaximin and 149 patients with
comparative agents (other antibiotics and lactulose). In the comparative
studies with lactulose, rifaximin was comparable to or more effective than
lactulose for the improvement of signs and symptoms of hepatic encephalopathy
and had a superior side effect profile.
The Company intends to conduct its own clinical trials using rifaximin to
treat AAC caused by C. difficile, a gram negative bacterium for which there
are currently few effective therapies. The Company has received allowance from
the FDA to begin these clinical trials, which the Company expects to begin in
the fourth quarter of 1997. Based on research conducted by Alfa Wassermann,
the Company believes that rifaximin has broad spectrum activity and may be
shown to be effective against C. difficile. Oral vancomycin was until recently
the preferred treatment for AAC. However, the emergence of vancomycin-
resistant bacteria has prompted the United States Centers for Disease Control
and Prevention to recommend limited use of vancomycin. No other therapy has
been approved for the treatment of AAC in the United States. Independent
research indicates that up to 2,000,000 people develop AAC each year in North
America.
Given the extremely low gastrointestinal absorption of rifaximin and a
promising cross-resistance profile, the Company believes rifaximin may be more
effective in eradicating H. pylori than other more commonly used antibiotics.
Alfa Wassermann has conducted a single non-comparative trial in Italy to
assess the efficacy of rifaximin in treating H. pylori induced peptic ulcers
and is currently organizing a co-operative study to supplement the earlier
findings.
BX-661A (Balsalazide) and BX-661C (Balsalazide)
Based on a preclinical evaluation of BX-661A, the Company believes that the
drug may be shown to be a chemopreventive agent to reduce colonic polyp growth
and believes that the drug may have potential for this indication. All
colorectal cancer starts as a polyp, and eventually all FAP patients develop
colorectal cancer. There are approximately 40,000 people in the United States
that have the genetic abnormality that causes FAP. Because this patient
population is genetically predisposed to polyp growth consistently throughout
life, they are an important subset of the general population who would be
eligible for therapy to retard polyp growth. Currently, the Company intends to
apply to the FDA for Orphan Drug Status for BX-661A (balsalazide) to treat
FAP. The Company plans to begin Phase III clinical trials of BX-661A in 1998
to measure its ability to prevent the recurrence of rectal polyps in patients
with FAP who have had partial or total colectomy.
Subsequently, the Company intends to pursue the possibility for a broader
indication of colonic polyp reduction in the general population with BX-661C
(balsalazide) should the data from the BX-661A prove positive. The Company
estimates that approximately 80 million persons in the United States and 95
million persons in Europe have colonic polyps, although the number of persons
who seek diagnosis and treatment for the condition is unknown.
38
<PAGE>
The Company believes that balsalazide has anti-inflammatory and antioxidant
properties that are similar to non-steroidal anti-inflammatory drugs
("NSAIDs") but lack NSAIDs' upper gastrointestinal ulcerogenic activity. In
addition, the Company believes that the colonic-specific delivery mechanism
for the drug results in very low systemic absorption significantly reducing
the possibility of renal side effects. In clinical studies evaluating a total
of more than 900 patients treated with balsalazide for a mean duration of 1.5
years, no cases of gastrointestinal ulceration or renal side effects have been
reported.
In collaboration with scientists at the University of California at San
Francisco ("UCSF") and the San Francisco Veterans Administration Medical
Center ("VA Medical Center"), balsalazide and a newly discovered metabolite of
balsalazide were shown in early studies to inhibit human colon cancer cell
proliferation in culture and to inhibit in animals one of the earliest steps
in colon polyp and cancer formation.
Further pre-clinical studies performed by the Company, using a genetic
strain of mice which develop multiple intestinal tumors and die before 5
months of age, showed that balsalazide prevented the formation of greater than
75% of these tumors in the colon. Based on these preliminary results, the
Company and scientists at UCSF and the VA Medical Center in San Francisco have
responded to a request from the National Cancer Institute ("NCI") to submit a
grant proposal to fund a clinical trial to test the effectiveness of
balsalazide in patients who are at increased risk of developing colorectal
cancer. The target patients are those who have had polyps removed and are
undergoing surveillance for polyp occurrence. The Company plans to commence
this study after receiving grant approval from the NCI and obtaining necessary
FDA clearance.
STRATEGIC ALLIANCES
The Company enters into various collaborations with corporate partners,
licensors, licensees and others. To date, the Company has entered into the
following strategic alliances:
Biorex Laboratories Limited
The Company in-licensed balsalazide and all its salts, including the
Company's first product, Colazide (balsalazide disodium), from Biorex, a
private, independent drug company headquartered in England. Biorex developed
Colazide and completed limited Phase III clinical trials. Under its agreements
with the Company, Biorex will participate in future milestone revenues and
profits from Colazide.
Pursuant to an agreement between Biorex and the Company, Biorex granted the
Company the exclusive worldwide right (other than Japan, Taiwan, Korea, and
the United States) to develop, manufacture and sell balsalazide for all
disease indications for a period of 15 years from the date of commercial
launch, subject to early termination in certain circumstances, including upon
the material breach by either party and, in the case of Biorex, in the event
of Salix's bankruptcy or if a sublicensee of the Company terminates or becomes
entitled to terminate such sublicense as a result of actions by the Company.
Under a separate agreement, Biorex granted the Company the exclusive right to
develop, manufacture and sell balsalazide for all disease indications in the
United States for a period of nine years from the date of commercial launch or
the term of the applicable patent, whichever is longer. Under these
agreements, the Company paid Biorex fees upon entering into the agreements and
is obligated to make additional milestone and royalty payments for the drug.
The royalty payments to be made by the Company pursuant to the agreement
governing the United States market are based on net sales, subject to minimum
royalty payments for the first five years following commercial launch. Under
the agreement governing territories other than the United States, the Company
is obligated to pay to Biorex a portion of any gross profit on Colazide sales
to Astra and Menarini outside the United States. Pursuant to such agreements,
the Company is responsible for completion of preclinical testing, clinical
trials and regulatory approvals for balsalazide.
Alfa Wassermann S.p.A.
The Company in-licensed rifaximin from Alfa Wassermann, a privately held
pharmaceutical company headquartered in Italy. Alfa Wassermann has developed
several glycosaminoglycans, rifaximin and alpha-
39
<PAGE>
interferon from human leukocytes. Alfa Wassermann's principal areas of
therapeutic focus include anti-thrombotics, antibiotics, gastrointestinal
products, NSAIDs, immunomodulators, anti-hypertensives, and bronchopulmonary
products. During recent years, Alfa Wassermann has formed alliances with
international partners to expand and strengthen its marketing and research
activities.
Pursuant to an agreement with the Company, Alfa Wassermann granted the
Company, in exchange for certain royalties, the exclusive right in the United
States and Canada to develop, make, use and sell or have sold rifaximin for
the treatment of gastrointestinal and respiratory tract diseases. Alfa
Wassermann has agreed separately to supply the Company with bulk active
ingredient rifaximin at a fixed price.
Pursuant to the license agreement, the Company has agreed to pay Alfa
Wassermann a net sales-based royalty as well as certain milestone payments.
The Company's obligation to pay royalties commences upon the commercial launch
of the product and continues until the later of (i) the expiration of the
period in which the manufacture, use or sale of the products by an unlicensed
third party would constitute an infringement on the patent covering the
product or (ii) the expiration of a period of 10 years from commercial launch.
Thereafter, the licenses granted to the Company shall continue as irrevocable
royalty-free paid-up licenses.
The license agreement does not have a set term and continues until
terminated in accordance with its terms. Either party to the agreement may
terminate it following a material breach by the other party and the failure of
such breaching party to remedy such breach within 60 days. In addition, Alfa
Wassermann has the right to terminate the agreement on three-months' written
notice in the event that the Company fails to use best efforts to develop the
product in a timely manner, fails to effect commercial launch within six
months of receipt of regulatory approval or fails to sell the product for a
period of six consecutive months after commercial launch. In addition, Alfa
Wassermann may terminate the agreement if the Company becomes involved in
bankruptcy, liquidation or similar proceedings. The Company may terminate the
agreement in respect of any indication or any part of the territory covered on
90 days' notice at which point its rights with respect to such indiction or
territory shall cease.
Astra AB
Astra, an international pharmaceutical company headquartered in Sweden, has
extensive experience developing and marketing therapies for gastrointestinal
diseases. The Company's alliance with Astra partially funded the development
of Colazide. Through June 30, 1997, Salix had received revenues for milestone
payments and product development funding of approximately $10.8 million out of
a total of $16.0 million payable upon achievement of certain milestones under
its agreements with Astra. The remaining milestone revenues relate to European
marketing approvals, the Company's recent NDA submission for Colazide and FDA
approval of the NDA. Under the terms of agreements between the Company and
Astra, the Company will sell encapsulated Colazide to Astra for marketing and
distribution in its territories at a price based on a percentage of Astra's
average ex-factory sales price. Astra has announced that commercial sales of
Colazide will begin in the United Kingdom in October 1997.
Pursuant to contracts between the Company and Astra, the two companies
agreed to collaborate in developing and obtaining regulatory approval of
Colazide in all the countries of the world excluding Italy, Spain, Portugal,
and Greece (collectively, "Southern Europe") and Japan, Taiwan and Korea
(collectively, "East Asia"). Under these agreements, the Company granted Astra
exclusive distribution rights to Colazide in all markets (except for Southern
Europe and East Asia) for specified indications. In addition, the companies
agreed to collaborate on development and promotional plans for Colazide in the
United States market. Astra is obligated to provide the Company with
milestone, license and development payments, and has agreed to purchase
encapsulated product from the Company at a transfer price based on a
percentage of Astra's selling price. In addition, the Company granted Astra
certain rights of first negotiation with respect to the development and
exploitation of additional indications for balsalazide
40
<PAGE>
disodium and a right of first refusal to obtain marketing rights in the United
States for gastrointestinal products for which Salix chooses not to assume the
sole and exclusive responsibility for marketing. For new indications for
Colazide, the agreements provide that the Company cannot market Colazide,
either directly or through third parties, without the prior consent of Astra.
The distribution agreement, with Astra (which covers all countries of the
world except Spain, Portugal, Greece, Japan, Korea, Taiwan and the United
States) has a base term of 15 years from the date of initial commercial launch,
unless terminated earlier in accordance with its terms. The agreement governing
the United States market expires, unless terminated earlier in accordance with
its terms, upon the later of (i) the expiration of the validity of the last of
the patents relating to the product or (ii) nine years from launch of the
product, except with respect to provisions governing trademark license,
indemnification and confidential information each of which have independent
termination provisions. Under both agreements, either party to the agreement is
entitled to terminate the agreement upon a material breach by the other party
and the failure to remedy such breach within 30 days in the case of a payment
breach or 90 days in the case of any other material breach or if the other
party enters bankruptcy, liquidation or similar proceedings.
Menarini Pharmaceutical Industries s.r.l.
Menarini, headquartered in Italy, is the largest manufacturer and distributor
of pharmaceuticals in Southern Europe. Menarini also has extensive experience
developing and marketing therapies for gastrointestinal disease in its markets.
Under its agreements with Menarini, the Company granted Menarini certain
manufacturing rights and exclusive distribution rights with respect to Colazide
in Italy, Spain, Portugal and Greece. Through June 30, 1997 the Company has
received revenues as partial contribution to research and development costs
borne by the Company of approximately $1.2 million. The agreement calls for
additional milestone revenues of $0.5 million to be paid to Salix relating to
European marketing approvals in the Menarini territories. The funding provided
through this alliance has allowed Salix to fund partially the development of
Colazide. Under the terms of its agreements, Salix will sell bulk active
ingredient Colazide to Menarini for marketing and distribution in its
territories at cost plus a sales-based royalty.
Unless terminated sooner in accordance with its terms, the agreement with
Menarini continues until the earlier of the expiration of (i) the patents
relating to the product or (ii) a period of 15 years from the date of the
agreement, provided however that in any case the agreement shall continue for a
period of 10 years from the date of first launch. Either party may terminate
the agreement upon a material breach by the other party and the failure to
remedy such breach within 30 days in the case of a payment breach or 90 days in
the case of any other material breach or if a party enters liquidation,
bankruptcy or similar proceedings.
MANUFACTURING
The Company has in the past used and will continue to use third party
manufacturers to produce material for use in clinical trials and for commercial
product. This manufacturing strategy enables the Company to direct its
financial resources to product in-licensing and acquisition, product
development, and sales and marketing efforts, without devoting resources to the
time and cost associated with building large manufacturing plants. The Company
chooses manufacturers who have demonstrated the ability to manufacture products
in accordance with Good Manufacturing Practice regulations and who have
manufactured products that have passed an FDA inspection.
Currently, bulk active ingredient Colazide is being manufactured for the
Company by Courtaulds Chemicals (Holdings) Limited in Scotland and is being
encapsulated for the Company by Anabolic, Inc. in Irvine, California.
41
<PAGE>
Under its supply agreement with the Company, Alfa Wassermann is obligated to
supply the Company with bulk active ingredient rifaximin. Currently, Alfa
Wassermann manufactures rifaximin for the Italian and other European markets.
MARKETING AND SALES
The Company has retained marketing rights in the United States and Canada to
rifaximin and plans to establish its own marketing and sales organization for
rifaximin and future products. The Company intends to establish a small,
specialized sales force to market rifaximin to the limited group of
approximately 9,700 gastroenterologists in the United States who are
responsible for treating most gastrointestinal disease. The Company believes
that a domestic direct sales force can effectively reach this small number of
physicians without the investment needed to develop and maintain a large sales
force. This direct sales force model will be the basis for the
commercialization of rifaximin and future products in the United States.
The Company has licensed the exclusive distribution rights for Colazide to
Astra and Menarini. The commercial relationships with Astra and Menarini have
provided the Company money needed to fund the late-stage development of
Colazide, to in-license other gastrointestinal products and to help establish
the Company as a viable gastrointestinal pharmaceutical company. The Company
received the necessary funding in exchange for the grant of exclusive
distribution rights to Astra and Menarini. The Company plans to implement
future North American product sales and marketing based on the direct sales
force model. See "--Strategic Alliances".
PATENTS AND PROPRIETARY RIGHTS
General
As with all pharmaceutical companies, the Company's success will depend on
its ability to maintain patent protection for its products, preserve trade
secrets, prevent third parties from infringing upon its proprietary rights,
and operate without infringing upon the proprietary rights of others, both in
the United States and internationally.
Colazide
The active ingredient of Colazide, balsalazide, and the method of treating
ulcerative colitis with Colazide are the subject of composition of matter
patents which have been issued to Biorex in the United States (expiring July
2001), the United Kingdom (expiring February 2002), France (expiring May
2002), Italy (expiring July 2001), and Germany (expiring April 2002). The
Company holds exclusive worldwide rights under the issued patents, excluding
Japan, Korea and Taiwan. The patents claim balsalazide disodium as well as
several variant molecules.
Additional patent applications have been filed by the Company in its own
name covering the use of balsalazide or any metabolite thereof for colorectal
cancer chemoprevention. A patent for the method of treating colon cancer was
issued in the United States to the Company in March 1996 and expires in
January 2014. Assuming patents issue for pending applications, patents for the
method of treating colon cancer will expire in January 2015 in various
countries in Europe, Asia, and North America. Claims to additional metabolites
are still pending in subsequent filings worldwide. No assurances can be given
that such additional patents will issue or, if issued, that they will provide
protection against similar or competing products.
Rifaximin
Rifaximin is covered by substance of matter patents which have issued in the
United States and major market territories of Europe. The original United
States composition-of-matter patent, which also covers the process of making
rifaximin and the use of rifaximin for the treatment of gastrointestinal
infectious
42
<PAGE>
diseases, expires in May 2001. A related Canadian patent also expires in May
2001. Additional patents on a manufacturing process and on the use of
rifaximin for the treatment of H. pylori infections have been issued in the
United States to Alfa Wassermann and such patents expire in April 2005 and
June 2013, respectively. Related Canadian patents expire in April 2005 and
February 2014, respectively.
Patent Term Extensions
The Company believes that some of these patents may be eligible for
extensions of up to five years based upon patent term restoration procedures
in Europe and in the United States under the Waxman-Hatch Act. Under the
Waxman-Hatch Act, the United States Patent and Trademark Office is directed to
extend the term of an eligible patent for a time equal to the "regulatory
review period for the approved product". This time period is generally one-
half the length of time between the effective date of the IND and submission
of the NDA, plus the length of time between filing and approval of the NDA, up
to a total possible extension of five years. Periods during which the
applicant did not act with "due diligence" are subtracted from the regulatory
review period. Under this law, the Colazide patent in the United States could
be extended by up to five years, giving the product patent protection until as
late as 2006 if approval in the United States is received before expiration of
the original patent term in 2001. In addition, the Company intends to seek
patent extensions under similar laws in effect in the European Union, which
could give Colazide extended patent protection in these jurisdictions until as
late as 2006.
GOVERNMENT REGULATION
The research, testing, manufacture, marketing and distribution of drug
products are extensively regulated by governmental authorities in the United
States and other countries. In the United States, drugs are subject to
rigorous regulation by the FDA. The Federal Food, Drug and Cosmetic Act, as
amended (the "FDC Act"), and the regulations promulgated thereunder, and other
federal and state statutes and regulations, govern, among other things, the
research, development, testing, manufacture, storage, record keeping,
labeling, promotion and marketing and distribution of pharmaceutical products.
Failure to comply with applicable regulatory requirements may subject a
company to administrative sanctions or judicially imposed sanctions such as
civil penalties, criminal prosecution, injunctions, product seizure or
detention, product recalls, and total or partial suspension of product
marketing and/or approvals. In addition, non-compliance may result in the
FDA's refusal to approve pending NDAs or supplements to approved NDAs or in
the withdrawal of an NDA. Any such sanction could result in adverse publicity,
which could have a material adverse effect on the Company's business,
financial conditions, and results of operation.
The steps ordinarily required before a new pharmaceutical product may be
marketed in the United States include: (i) preclinical laboratory tests,
preclinical studies in animals and formulation studies; (ii) the submission to
the FDA of a notice of claimed investigational exemption for a new drug or
antibiotic, which must become effective before clinical testing may commence;
(iii) adequate and well-controlled clinical human trials to establish the
safety and efficacy of the drug for each indication; (iv) the submission of an
NDA to the FDA; and (v) FDA review and approval of the NDA prior to any
commercial sale or shipment of the drug. Preclinical tests include laboratory
evaluation of product chemistry and formulation, as well as animal studies to
assess the potential safety and efficacy of the product. Preclinical tests
must be conducted in compliance with Good Laboratory Practice regulations. The
results of preclinical testing are submitted to the FDA as part of an IND. A
30-day waiting period after the filing of each IND is required prior to the
commencement of clinical testing in humans. In addition, the FDA may, at any
time during this 30-day period or at any time thereafter, impose a clinical
hold on proposed or ongoing clinical trials. If the FDA imposes a clinical
hold, clinical trials cannot commence or recommence without FDA authorization
and then only under terms authorized by the FDA. In some instances, the IND
application process can result in substantial delay and expense.
43
<PAGE>
Clinical trials to support NDAs are typically conducted in three sequential
phases, but the phases may overlap. In Phase I, the initial introduction of
the drug into healthy human subjects or patients, the drug is tested to assess
metabolism, pharmacokinetics and pharmacological actions and safety, including
side effects associated with increasing doses. Phase II usually involves
studies in a limited patient population to (i) assess the efficacy of the drug
in specific, targeted indications, (ii) assess dosage tolerance and optimal
dosage and (iii) identify possible adverse effects and safety risks. If a
compound is found to be potentially effective and to have an acceptable safety
profile in Phase II evaluations, Phase III trials are undertaken to further
demonstrate clinical efficacy and to further test for safety within an
expanded patient population at geographically dispersed clinical study sites.
There can be no assurance that Phase I, Phase II or Phase III testing will be
completed successfully within any specified time period, if at all, with
respect to any of the Company's products subject to such testing.
After successful completion of the required clinical testing, generally an
NDA is submitted. FDA approval of the NDA is required before marketing may
begin in the United States. The FDA reviews all NDAs submitted before it
accepts them for filing and may request additional information rather than
accepting an NDA for filing. In such an event, the NDA must be resubmitted
with the additional information and, again, is subject to review before
filing. Once the submission is accepted for filing, the FDA begins an in-depth
review of the NDA. Under the FDC Act, the FDA has 180 days in which to review
the NDA and respond to the applicant. The review process is often
significantly extended by FDA requests for additional information or
clarification regarding information already provided in the submission. The
FDA may refer the application to an appropriate advisory committee, typically
a panel of clinicians, for review, evaluation and a recommendation as to
whether the application should be approved. The FDA is not bound by the
recommendation of an advisory committee. If FDA evaluations of the NDA and the
manufacturing facilities are favorable, the FDA may issue either an approval
letter or an approvable letter, which usually contains a number of conditions
that must be met in order to secure final approval of the NDA. When and if
those conditions have been met to the FDA's satisfaction, the FDA will issue
an approval letter, authorizing commercial marketing of the drug for certain
indications. If the FDA's evaluation of the NDA submission or manufacturing
facilities is not favorable, the FDA may refuse to approve the NDA or issue a
not approvable letter, outlining the deficiencies in the submission and often
requiring additional testing or information. If regulatory approval of
Colazide or any other product is granted, such approval will be limited to
those disease states and conditions for which the product has been found by
the FDA to be safe and effective, as demonstrated through well controlled
clinical studies. Even if such regulatory approval is obtained, a marketed
product, its manufacturer and its manufacturing facilities are subject to
continual review and periodic inspections. In addition, identification of
certain side effects after a drug is on the market or the occurrence of
manufacturing problems could cause subsequent withdrawal of approval,
reformulation of the drug, additional preclinical testing or clinical trials
and changes in labeling of the product.
For antibiotic drug products such as rifaximin, FDA testing and approval
procedures are analogous to those applicable to non-antibiotic drugs except
that approval also requires the establishment of an antibiotic monograph
setting forth the tests and specifications for the drug, which are published
by the FDA as a regulation and codified in the Code of Federal Regulations.
On June 23, 1997, the Company submitted an NDA to the FDA covering the use
of Colazide as a therapy for acute ulcerative colitis and in August 1997, the
NDA was accepted for filing by the FDA. The NDA can be approved only if the
FDA determines that the NDA contains substantial evidence from clinical trials
that the drug is safe and effective for its intended use. There can be no
assurance that the results of the Company's preclinical or clinical studies,
including its United States Phase III clinical testing in combination with the
results from a European safety and efficacy study, will demonstrate, to the
FDA's satisfaction, substantial evidence that the drug is safe and effective.
If clinical data, in addition to that filed in the NDA, is requested from the
Company to support approval of Colazide, such a request is likely to
significantly delay approval of the product, if approval is granted at all. If
regulatory approval of Colazide
44
<PAGE>
or any other product is granted, such approval will be limited to those disease
states and conditions for which the product has been shown to be safe and
effective, as demonstrated to the FDA's satisfaction through well controlled
clinical studies. Furthermore, approval may entail ongoing requirements for
post-marketing studies. Even if such regulatory approval is obtained, a
marketed product, promotional activities for the product, its manufacturer and
its manufacturing facilities are subject to continual review and periodic
inspections. In addition, identification of certain side effects after a drug
is on the market or the occurrence of manufacturing problems could cause
subsequent withdrawal of approval, reformulation of the drug, additional
preclinical testing or clinical trials and changes in labeling of the product.
The Company does not expect to file an NDA for rifaximin prior to mid-1998 and
will do so only if the clinical trials support such a filing.
Under the Orphan Drug Act, the FDA may designate a product as an orphan drug
if it is a drug intended to treat a "rare disease or condition", which is a
disease or condition that affects populations of fewer than 200,000 individuals
in the United States or a disease whose incidence rates number more than
200,000 where the sponsor establishes that it does not realistically anticipate
that its product sales will be sufficient to recover its costs. The sponsor
that obtains the first marketing approval for a designated orphan drug for a
given rare disease is eligible to receive marketing exclusivity for use of that
drug for the orphan indication for a period of seven years. The Company may
apply for orphan drug designation for some of its products and indications in
development. There is no assurance that the FDA would grant orphan drug
designation or marketing exclusivity for any such indications or products or
that, if granted, such exclusivity would effectively protect the product from
competition.
Drug manufacturing establishments are subject to periodic inspection by
regulatory authorities and must comply with Good Manufacturing Practice
regulations. The Company or its third party manufacturer must pass a
preapproval inspection of its manufacturing facilities by the FDA before
obtaining marketing approval of any products for sale in the United States.
These manufacturers are also subject to periodic FDA inspections. In the event
that violations of applicable standards are found, the Company may be required
to cease distribution of some or all products and may be required to recall
products already distributed.
REGULATION OF DRUG COMPOUNDS OUTSIDE OF THE UNITED STATES
Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials and marketing authorization vary widely from country to country. At
present, foreign marketing authorizations are applied for at a national level,
although within the European Union procedures are available to companies
wishing to market a product in more than one European Union member state. The
foreign regulatory approval process includes all of the risks associated with
FDA approval set forth above.
To market its products in Europe, the Company also must satisfy foreign
regulatory requirements, implemented by foreign health authorities, governing
human clinical trials and marketing approval. In the United Kingdom, the sale
and marketing of new drugs is subject to the approval of the Medicines Control
Agency (the "MCA"). As in the United States, a company seeking regulatory
approval must submit an application requesting such approval, which is referred
to as a Product Licence Application ("PLA"). The PLA is submitted after
completion of pre-clinical and clinical studies. The MCA may request additional
clinical information on efficacy or safety before formally reviewing the
application. Following a review of the PLA, the MCA makes a determination as to
approval of the new drug compound. The review process in the United Kingdom is
subject to many of the same uncertainties and risks associated with the
approval of new drugs by the FDA in the United States. Furthermore, approval
may entail ongoing requirements for post-marketing studies. Even if such
regulatory approval is obtained, a marketed product and its manufacturer and
its manufacturing facilities are subject to continual review and periodic
inspections by the MCA.
45
<PAGE>
Under a new regulatory system in Europe, marketing authorizations, broadly
speaking, may be submitted at either a centralized, a decentralized or a
national level. The centralized procedure is mandatory for the approval of
biotechnology and high technology products and available at the applicant's
option for other products. The centralized procedure provides for the first
time in the European Union (the "EU") for the grant of a single marketing
authorization which is valid in all EU Member States.
As of January 1995, a mutual recognition procedure is available at the
request of the applicant for all medicinal products which are not subject to
the centralized procedure under the so called "decentralized procedure". The
decentralized procedure, which will be mandatory beginning in January 1998,
creates a new system for mutual recognition of national approval decisions,
makes changes in existing procedures for national approvals and establishes
procedures for coordinated EU actions on products, suspensions and
withdrawals. Under this procedure, the holder of a national marketing
authorization for which mutual recognition is sought may submit an application
to one or more Member States, certify that the dossier is identical to that on
which the first approval was based or explain any differences and certify that
identical dossiers are being submitted to all Member States for which
recognition is sought. Within 90 days of receiving the application and
assessment report, each Member State must decide whether to recognize the
approval. The procedure encourages Member States to work with applicants and
other regulatory authorities to resolve disputes concerning mutual
recognition. Lack of objection of a given country within 90 days automatically
results in approval of the EU country. If such disputes cannot be resolved
within the 90 day period provided for review, the application will be subject
to a binding arbitration procedure. Notwithstanding these simplified
procedures, the foreign regulatory approval process includes many of the risks
associated with FDA approval set forth above. The PLA that the Company filed
with the MCA for the acute ulcerative colitis indication, which was approved
in July 1997, was filed under these mutual recognition procedures.
The Company will choose the appropriate route of European regulatory filing
to accomplish the most rapid regulatory approvals. However, there can be no
assurance that the chosen regulatory strategy will secure regulatory approvals
or approvals of the Company's chosen product indications.
COMPETITION
Competition in the pharmaceutical industry is intense and characterized by
extensive research efforts and rapid technological progress. The Company
believes that there are numerous pharmaceutical and biotechnology companies,
both public and private and including large well known pharmaceutical
companies, as well as academic research groups that are engaged in research
and development efforts for gastrointestinal diseases and conditions addressed
by the Company's current and potential products. In particular, the Company is
aware of products in research or development by competitors that address the
diseases being targeted by the Company's products. There can be no assurance
that developments by others will not render the Company's current and
potential products obsolete or noncompetitive. Competitors may be able to
complete the development and regulatory approval process sooner and,
therefore, market their products earlier than the Company. Many of the
Company's competitors have substantially greater financial, marketing and
human resources and development capabilities than the Company. For example,
many large, well capitalized companies already offer products in the United
States and Europe that will compete with the Company's proposed therapeutic
applications of Colazide, including mesalamine (SmithKline Beecham plc, Dr.
Falk Pharma GmbH, Pharmacia & Upjohn, Inc., Solvay S.A., The Procter & Gamble
Company, and Hoechst Marion Roussel, Inc.), sulfasalazine (Pharmacia & Upjohn,
Inc.), and olsalazine (Pharmacia & Upjohn, Inc.). Technological developments
by competitors, earlier regulatory approval for marketing competitive
products, or superior marketing capabilities possessed by competitors could
adversely affect the commercial potential of the Company's products, including
Colazide, and could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, manufacturers of
generic drugs may seek to compete directly with the Company's products in the
absence of effective patent protection or non-patent exclusivity protections.
46
<PAGE>
FACILITIES
The Company occupies approximately 7,500 square feet of office space in Palo
Alto, California, approximately 200 square feet of office space in Hamilton,
Bermuda, and approximately 260 square feet of office space in Dorset, England.
The Palo Alto facility's lease extends through August 31, 2001. The Company
considers this space adequate for its anticipated needs into the foreseeable
future.
EMPLOYEES
As of June 30, 1997, the Company had 17 employees. The Company believes that
its future success will depend in part on its continued ability to attract,
hire, and retain qualified personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be able to
identify, attract, and retain such personnel in the future. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with its employees
to be good.
47
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS, AND KEY EMPLOYEES
The following table sets forth certain information concerning the executive
officers, directors, and certain key employees of the Company and its
subsidiaries, including their ages as of July 31, 1997 and their place of
residence:
<TABLE>
<CAPTION>
NAME AGE POSITION RESIDENCE
---- --- -------- ---------
<S> <C> <C> <C>
Randy W. Hamilton....... 44 Chairman, President and Los Altos, California, U.S.A.
Chief Executive Officer
David Boyle............. 43 Vice President, Finance & Cupertino, California, U.S.A.
Administration, and Chief
Financial Officer
John Brough............. 44 President, Glycyx Southampton, Bermuda
Pharmaceuticals, Ltd.
Alvaro E. Carvajal...... 54 Vice President, Information San Francisco, California,
Systems (Salix U.S.A.
Pharmaceuticals)
Lorin K. Johnson, 44 Vice President, Research, Pleasanton, California, U.S.A.
Ph.D................... and Director
Robert P. Ruscher....... 37 Vice President, Corporate Raleigh, North Carolina, U.S.A.
Development
James G. Shook, Ph.D.... 57 Senior Vice President, Redwood City, California, U.S.A.
Development (Salix
Pharmaceuticals)
Jay A. Lefton........... 41 Corporate Secretary Toronto, Ontario, Canada
Lily Baxendale,
F.R.S.C................ 72 Director London, United Kingdom
Lawrance A. Brown,
Jr.(/1/)(/2/).......... 69 Director Palo Alto, California, U.S.A.
John F. 60 Director Gladwyne, Pennsylvania, U.S.A.
Chappell(/1/)(/2/).....
Nicholas M. Ediger...... 69 Director Fredericton, New Brunswick,
Canada
David E. Lauck.......... 62 Director Florence, Oregon, U.S.A.
</TABLE>
- --------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
Randy W. Hamilton is a co-founder of the Company and has served as Chairman
of its Board of Directors and President and Chief Executive Officer since
December 1993. From November 1989 to December 1993, Mr. Hamilton served as
President and Chief Executive Officer and as a director of Salix
Pharmaceuticals, Inc. Prior to 1989, Mr. Hamilton served as Director of
Planning and Business Development with SmithKline Diagnostics, Inc., a medical
diagnostic subsidiary of SmithKline Beecham plc, a pharmaceutical company, and
as head of Asian business development for California Biotechnology Inc. (now
Scios, Inc.), a biotechnology company.
David Boyle has served as the Company's Vice President, Finance and
Administration, and Chief Financial Officer since November 1996. From May 1992
to October 1996, Mr. Boyle was employed by Ares Serono Group, a Swiss
pharmaceutical company, most recently as Vice President, Finance and
Administration (North America), and previously as Director, Business Analysis
Group. Prior to joining Ares Serono, Mr. Boyle held various accounting and
finance positions with Ernst & Young LLP.
John Brough has served as President of Glycyx Pharmaceuticals, Ltd. since
July 1996. From April 1995 to April 1996, he served as President, and from May
1989 to April 1995 as Director, Finance and Administration, of Syntex
Pharmaceuticals International Ltd., a subsidiary of Syntex Corporation
("Syntex"), a pharmaceutical company acquired in 1994 by The Roche Group.
48
<PAGE>
Alvaro E. Carvajal has served as the Vice President, Information Systems of
Salix Pharmaceuticals since August 1997. From January 1994 to August 1997, Mr.
Carvajal served as the Director, Information Systems of Salix Pharmaceuticals.
From 1989 to January 1994, he served as an international systems consultant
for Syntex.
Lorin K. Johnson, Ph.D. is a co-founder of the Company and has served as the
Company's Vice President, Research, and as a member of its Board of Directors
since December 1993. From November 1989 to December 1993, Dr. Johnson held the
same positions at Salix Pharmaceuticals, Inc. Prior to co-founding Salix, Dr.
Johnson served as Director of Scientific Operations at California
Biotechnology Inc. Prior to joining California Biotechnology, Dr. Johnson was
assistant Professor of Pathology at Stanford University Medical Center.
Robert P. Ruscher has served as the Company's Vice President, Corporate
Development, and General Counsel since February 1996. From May 1996 to
November 1996, he also served as the Company's Chief Financial Officer. Since
April 1994, Mr. Ruscher has been associated with the law firm of Wyrick,
Robbins, Yates & Ponton, L.L.P. in Raleigh, North Carolina. From February 1993
to April 1994, Mr. Ruscher was an associate at the law firm Venture Law Group
in Menlo Park, California, and from August 1989 to February 1993, he was an
associate at the law firm Wilson Sonsini Goodrich & Rosati in Palo Alto,
California.
James G. Shook, Ph. D. has served as the Senior Vice President, Development
of Salix Pharmaceuticals, Inc. since April 1997. From August 1994 to April
1997, Dr. Shook served as Vice President, Research and Development of Fujisawa
Pharmaceuticals U.S.A., a pharmaceutical company. From September 1993 to
August 1994, Dr. Shook served as Acting Vice President, Research and
Development, and Vice President, Research and Development Operations at
Fujisawa and from June 1992 to September 1993 as Vice President, Research and
Development Operations and Project Director, Immunology.
Jay A. Lefton has served as the Company's Corporate Secretary since April
1997. Mr. Lefton has been a partner of the law firm of Aird & Berlis in
Toronto, Ontario since 1986, where he specializes in corporate and securities
law. He is also a member of the Board of Directors of International Murex
Technologies Corporation, a publicly-traded company on The Nasdaq National
Market, and Harley Street Software Ltd. and Sumtra Diversified Inc., each of
which is publicly-traded in Canada. Aird & Berlis has and is currently
providing legal counsel to the Company in Canada.
Lily Baxendale, F.R.S.C., has served as a director of the Company since July
1995. Miss Baxendale has served since 1983 as Managing Director of Biorex, a
pharmaceutical development company, which she co-founded in 1950. Prior to
1983, Miss Baxendale served as a director and secretary of Biorex. Miss
Baxendale is a Fellow of the Royal Society of Chemists.
Lawrance A. Brown, Jr. has served as a director of the Company since October
1994 and as a member of its audit and compensation committees since December
1994. Since 1992, Mr. Brown has been a self-employed consultant. Prior to
1992, Mr. Brown was a General Partner of Continental Capital and,
subsequently, a consultant to MBW Ventures. Before his venture capital
activities, Mr. Brown worked for SmithKline Corporation, a pharmaceutical
company, retiring as a Group Vice President.
John F. Chappell has served as a director of the Company since September
1990 and as a member of its audit and compensation committees since December
1994. Since December 1990, Mr. Chappell has been President of Plexus Ventures,
Inc., a private consulting firm specializing in advising early stage
pharmaceutical companies. Prior to 1990, Mr. Chappell served in various
capacities at SmithKline Beecham plc, most recently as Chairman, Worldwide
Pharmaceuticals and a member of its Board of Directors. Mr. Chappell also
serves as a director of Neurex Corporation.
49
<PAGE>
Nicholas M. Ediger has served as a director of the Company since February
1997. Since October 1988, Mr. Ediger has served as Managing Director of
Sentinel Associates, a finance and energy consulting firm. Prior to joining
Sentinel, Mr. Ediger served for 14 years as President and Chief Executive
Officer of Eldorado Resources Ltd., an energy and mineral company. Prior to
joining Eldorado, Mr. Ediger worked for 25 years with Gulf Oil Corporation,
including as Chief Operating Officer of Gulf Minerals Canada Ltd.
David E. Lauck is a co-founder of the Company and has served as a director
since December 1993. Mr. Lauck served as the Company's Vice President,
Development from February 1994 until June 1997 and has been working as a part
time employee with the Company since such time. From December 1993 to January
1994, he was the Company's Director of European Development. Prior to December
1993, Mr. Lauck served as an officer and director of Salix Pharmaceuticals
including in the positions of Director/Europe from October 1992 to December
1993 and Vice President of Regulatory Affairs from November 1989 to September
1992.
All directors are elected at the annual meeting of shareholders and hold
office until the election and qualification of their successors at the next
annual meeting of shareholders. Officers of the Company serve at the
discretion of the Board of Directors.
SCIENTIFIC ADVISORY BOARD
The Company assembles teams of scientific and medical advisors to advise the
Company on issues related to specific pharmaceutical products. The Company's
current group of advisors are experts in gastrointestinal disease and
specifically inflammatory bowel disease and colorectal cancer. The Company
plans to assemble different advisory groups specific to other products under
development. In certain cases, these advisors have agreed to be available for
consultation for a specified number of days each year, but individuals may
consult and meet informally with the Company on a more frequent basis. All of
the Company's scientific and medical advisors are employed by major medical
schools, research institutions, hospitals or other institutions and may have
other commitments that may limit their availability to the Company. Salix's
current advisory group is as follows:
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<C> <S>
Marvin H. Sleisenger, M.D., M.A.C.P... Consulting Medical Director of Salix
and Professor of Medicine, University
of California, San Francisco
J.E. Lennard-Jones, M.D., F.R.C.P..... Professor Emeritus of
Gastroenterology, University of
London, England
Young S. Kim, M.D..................... Professor of Medicine, University of
California,
San Francisco
Stephen B. Hanauer, M.D............... Director, Gastrointestinal Clinical
Research Center, University of Chicago
James L. Madara, M.D.................. Professor of Pathology, Harvard
Medical School
Robert W. Beart, Jr., M.D............. Professor of Surgery, University of
Southern California
James M. Church, M.D.................. Member, Department of Colorectal
Surgery,
Cleveland Clinic
Robert D. Madoff, M.D................. Clinical Assistant Professor of
Surgery, Director of Research,
University of Minnesota Medical School
</TABLE>
Marvin H. Sleisenger, M.D., MACP is the Consulting Medical Director of the
Company and past Chairman of the Company's Scientific and Medical Advisory
Board. Dr. Sleisenger is Professor of Medicine and Director, Cancer Research
Institute at the University of California, San Francisco. He is author of
Gastrointestinal Disease, a widely used medical textbook. Dr. Sleisenger is
past President of the American Gastroenterological Association, a Fellow of
the Royal College of Physicians (London) and a Master of the American College
of Physicians.
50
<PAGE>
J.E. Lennard-Jones, M.D., FRCP, FRCS is Professor Emeritus of
Gastroenterology at the University of London, England. Until recently, Dr.
Lennard-Jones was a consulting gastroenterologist at St. Mark's Hospital in
London, and he is Professor Emeritus at the London Hospital Medical College.
He is past President of the British Society of Gastroenterology and President
of the British Digestive Foundation. He has contributed to numerous scientific
publications, primarily on topics related to inflammatory bowel disease.
Young S. Kim, M.D. is a Professor of Medicine at the University of
California at San Francisco, where he is also Scientific Director of the
Colorectal Cancer Program. Dr. Kim is also Director of the Gastrointestinal
Research Laboratory at the San Francisco Veterans Administration Medical
Center. He has been associated with both of these institutions since 1968. Dr.
Kim's major research interests are in the areas of experimental pathology in
gastrointestinal neoplasms, glycoprotein biochemistry, and enzymology and
membrane biochemistry of the gut. Dr. Kim has authored numerous articles in
his areas of study and currently serves on the editorial boards of The
International Journal of Experimental and Clinical Gastroenterology, Tumor
Biology and Pancreas.
Stephen B. Hanauer, M.D. has served as Director of the Gastrointestinal
Clinical Research Center at the University of Chicago since 1983 and is co-
director of the Inflammatory Bowel Disease Research Center at the University
of Chicago. He was Chairman of the Clinical Affairs/Professional Education
Committee of the Crohns & Colitis Foundation of America and has served on
numerous other national committees in the field of gastroenterology. Dr.
Hanauer served as a member of the FDA Advisory Panel for gastrointestinal
products and has authored the FDA guidelines for the clinical evaluation of
drugs for patients with inflammatory bowel disease. He has authored numerous
articles in the field and is a reviewer for publications including the New
England Journal of Medicine, Gastroenterology, the American Journal of
Gastroenterology and the Annals of Internal Medicine. He is a member of the
editorial board for the American Journal of Gastroenterology, Alimentary
Pharmacology & Therapeutics, and the Journal of Inflammatory Bowel Disease.
James L. Madara, M.D. is Associate Professor of Pathology and Associate
Professor of Health Sciences and Technology at Harvard University. Dr. Madara
has been associated with the Harvard Medical School since 1978. His major
research interests are in the areas of regulation of intestinal epithelial
permeability, inflammation of the intestinal epithelium and repair of
epithelial wounding. He is an author of numerous articles in
gastroenterological research and holds or has held editorial positions with
Gastroenterology, The American Journal of Physiology (Cell), Epithelial Cell
Biology, the Journal of Clinical Investigation and The American Journal of
Pathology.
Robert W. Beart, Jr., M.D. is currently a Professor of Surgery, specializing
in colon and rectal surgery, at the University of Southern California in Los
Angeles. His major research interests include prevention and management of
recurrent colorectal cancer, fecal continence preservation, and related areas
of gastrointestinal medicine. Previous academic appointments have included
several positions with the Mayo Clinic School of Medicine. He has served as
President of the American Society of Colon and Rectal Surgeons and has served
on the editorial board of several medical journals in the fields of surgery,
oncology and gastroenterology.
James M. Church, M.D. is currently a member of the Colorectal Surgery
Department of the Cleveland Clinic in Cleveland, Ohio. His major research
interests include chemoprevention of colonic polyps, familial adenomatous
polyposis, desmoid tumors, management of recurrent colorectal cancer, and
related areas of colorectal surgery and medicine. Previous appointments have
included positions at the University of Auckland in New Zealand. Dr. Church
has been the recipient of numerous fellowships and awards and has published
extensively in the field of colorectal disease and surgery.
51
<PAGE>
Robert D. Madoff, M.D. is currently a Clinical Assistant Professor of
Surgery and Director of Research in the Division of Colon and Rectal Surgery
at the University of Minnesota Medical School. His major research interests
include management of polyps, inflammatory bowel disease, diverticular
disease, colorectal cancer, fecal incontinence, and rectal prolapse. Previous
appointments have included positions at the University of Massachusetts
Medical School. He has served as Chief of the Colorectal Surgery Section of
the Veterans Administration Medical Center in Minneapolis. Dr. Madoff has
published and presented numerous papers in the field of colorectal disease and
surgery.
DIRECTOR COMPENSATION
The Company reimburses each member of the Company's Board of Directors for
out-of-pocket expenses incurred in connection with attending Board meetings.
In addition, directors Nicholas M. Ediger and Lawrance A. Brown are
compensated $1,000 for each meeting of the Board they attend in person. Other
than Messrs. Ediger and Brown, all directors are either employed by the
Company and/or hold a substantial equity position in the Company, and no
member of the Board of Directors currently receives any additional cash
compensation for his or her service as director. In February 1997, Mr. Ediger
was granted a non-qualified stock option under the Company's 1996 Stock Option
Plan to purchase 10,000 Common Shares at an exercise price equal to the fair
market value of the Common Shares on the date of grant. Such option vests at
the rate of 1/36th of the shares subject to option per month. In addition, the
Company paid Mr. Brown $11,500 during the year ended December 31, 1996 in
connection with a consulting arrangement with the Company. Directors may from
time to time provide services as consultants that may provide for additional
consulting services at agreed upon rates.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for executive officers of the
Company and administers various incentive compensation and benefit plans. The
Compensation Committee consists of directors Lawrance A. Brown and John F.
Chappell. Randy W. Hamilton, President and Chief Executive Officer of the
Company, participates in all discussions and decisions regarding salaries and
incentive compensation for all executive officers of the Company, except that
he is excluded from discussions regarding his own salary and incentive stock
compensation. No interlocking relationship exists between any member of the
Company's Compensation Committee and any member of any other company's board
of directors or compensation committee.
52
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during each of the fiscal years in the three year period ended
December 31, 1996, by (i) the Company's Chief Executive Officer and (ii) the
Company's executive officers whose salary and bonus for fiscal year 1996
exceeded Cdn. $100,000, which totals approximately U.S. $73,000 based on a
December 31, 1996 exchange rate of Cdn. $1.3696 per U.S. $1.00. The officers
of the Company listed on the table set forth below are referred to
collectively in this Prospectus as the "Named Executive Officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION (/1/) SECURITIES ALL OTHER
FISCAL -------------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY (U.S. $) BONUS (U.S. $) OPTIONS (#) (U.S. $) (/2/)
- --------------------------- ------ --------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Randy W. Hamilton......... 1996 $216,000 $-- -- $998
Chairman, President and 1995 78,000 -- -- --
Chief Executive Officer 1994 119,167 -- -- --
Lorin K. Johnson.......... 1996 182,333 -- -- 837
Vice President, Research 1995 66,000 -- -- --
and Director 1994 100,833 -- -- --
David E. Lauck(/3/)....... 1996 181,113 -- -- --
Former Vice President, 1995 63,308 -- -- --
Development 1994 95,854 -- -- --
Robert P. Ruscher(/4/).... 1996 136,086 -- -- 787
Vice President, Corporate 1995 52,677(/5/) -- 60,000 --
Development 1994 12,500(/6/) -- 2,825 --
</TABLE>
- --------
(/1/) Other than the salary described herein, the Company did not pay any Named
Executive Officer any fringe benefits, perquisites, or other compensation
in excess of 10% of such executive officer's salary and bonus during
fiscal years 1994, 1995 or 1996.
(/2/) Represents matching contributions under the Company's 401(k) retirement
plan.
(/3/) Mr. Lauck resigned as the Company's Vice President, Development in June
1997.
(/4/) Mr. Ruscher became the Company's Vice President, Corporate Development in
February 1996.
(/5/) Represents compensation paid to Mr. Ruscher as Director of Corporate
Affairs and General Counsel.
(/6/) Represents compensation paid to Mr. Ruscher as a consultant to the
Company.
OPTION GRANTS IN FISCAL YEAR 1996
No stock options were granted to any Named Executive Officer during the
fiscal year ended December 31, 1996.
53
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
Options to purchase an aggregate of 2,825 Common Shares were exercised by a
Named Executive Officer during the fiscal year ended December 31, 1996. The
following table sets forth certain information regarding the exercise of stock
options by the Named Executive Officers during the fiscal 1996 and stock
options held as of December 31, 1996 by the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED OPTIONS AT IN-THE-MONEY OPTIONS AT
ON VALUE DECEMBER 31,1996(#) DECEMBER 31, 1996(U.S. $)(/2/)
EXERCISE REALIZED --------------------------- ----------------------------------
NAME (#) (U.S. $)(/1/) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ------------- ------------ -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Randy W. Hamilton....... -- $ -- -- -- $ -- $ --
Lorin K. Johnson........ -- -- -- -- -- --
David E. Lauck.......... -- -- -- -- -- --
Robert P. Ruscher....... 2,825 2,825 25,000 35,000 66,250 92,750
</TABLE>
- --------
(1) Based on the fair market value of the Common Shares on the date of exercise
minus the exercise price.
(2) Based on the closing sales price in trading on The Toronto Stock Exchange
on December 31, 1996 as converted to U.S. dollars at the exchange rate of
Cdn. $1.3696 to U.S. $1.00 minus the exercise price for the applicable
options.
STOCK PLANS
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors and approved by the Company's shareholders in February
1996. The 1996 Plan provides for the grant of incentive stock options to
employees (including officers and employee directors) and for the grant of
non-statutory stock options to eligible participants. A total of 1,150,000
Common Shares have been reserved for issuance under the 1996 Plan; provided,
however, that the number of Common Shares that may be optioned and sold under
the 1996 Plan must not exceed the sum of (i) 711,175 Common Shares plus (ii)
such number of Common Shares as are subject to outstanding and unexercised
options under the Company's 1994 Stock Plan (the "1994 Plan" and, together
with the 1996 Plan, the "Stock Plans") as of the date of adoption of the 1996
Plan, which options are thereafter canceled or otherwise terminated without
exercise. Unless terminated sooner, the 1996 Plan will terminate automatically
in 2006. The 1996 Plan replaced the 1994 Plan. Options and share purchase
rights previously issued under the 1994 Plan shall be exercisable according to
their terms.
The 1996 Plan provides for administration by the Board of Directors of
Company or by a committee approved by the Board (as applicable, the
"Administrator"), in either case, in a manner that complies with requirements
under the applicable state and federal corporate and securities laws, the
Internal Revenue Code of 1986, as amended (the "Code"), and any applicable
stock exchange. If permitted by Rule 16b-3 of the Exchange Act, the 1996 Plan
may be administered by different bodies with respect to directors, officers
and employees who are neither directors nor officers. The interpretation and
construction of any provision of the 1996 Plan will be determined by the
Administrator whose determination will be final and conclusive. The
Administrator has the power to determine the terms of the options granted,
including the exercise price of the option, the number of shares subject to
each option, the exercisability thereof, and the form of consideration payable
upon such exercise. However, no participant may be granted (i) more than 50%
of the total number of shares reserved under the 1996 Plan within any twelve
calendar month period, or (ii) options covering a number of shares that exceed
5% of the issued and outstanding Common Shares at the time of grant. With
respect to grants to officers, the following limitations shall apply: (i) the
maximum number of shares which may be granted under options held by all
officers of the Company may not exceed 10% of the issued and outstanding
shares of Common Shares at the time of grant (excluding shares issued pursuant
to share compensation arrangements over the preceding 12-month period); (ii)
the maximum number of shares which may be granted under options to any one
officer and such officer's associates in any 12-month period shall be 5% of
the issued and outstanding Common Shares at the time
54
<PAGE>
of grant (excluding shares issued pursuant to share compensation arrangements
over the preceding 12-month period); and (iii) the maximum number of shares
which may be granted under options to officers in any 12-month period shall be
10% of the issued and outstanding Common Shares at the time of grant
(excluding shares issued pursuant to share compensation arrangements over the
preceding 12-month period). In addition, the Administrator has the authority
to amend, suspend or terminate the 1996 Plan, provided that no such action may
affect any Common Shares previously issued and sold or any option previously
granted under the 1996 Plan.
Options granted under the 1996 Plan are not transferable by the optionee.
Options granted under the 1996 Plan must generally be exercised within 90 days
after the end of optionee's status as an employee or consultant of the
Company, or within 12 months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's term.
The exercise price of all incentive stock options granted under the 1996
Plan must be at least equal to the fair market value of the Common Shares on
the date of grant. The exercise price of nonstatutory stock options granted
under the 1996 Plan is determined by the Administrator, but with respect to
nonstatutory stock options granted to officers, the exercise price must at
least be equal to the fair market value of the Common Shares on the date of
grant. With respect to any participant who owns shares possessing more than
10% of the voting power of all classes of the Company's outstanding share
capital, the exercise price of any incentive stock option granted must equal
at least 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other
options granted under the 1996 Plan may not exceed 10 years.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the Administrator shall provide
for the optionee to have the right to exercise the option as to all of the
optioned shares, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option exercisable in full in the
event of a merger or sale of assets, the Administrator shall notify the
optionee that the option shall be fully exercisable for a period of 10 days
from the date of such notice, and the option will terminate upon the
expiration of such period.
Options granted under the 1994 Plan must generally be exercised within three
months of the end of the Optionee's status as an employee or consultant of the
Company, within six months of such optionee's termination by disability or
within six months after such optionee's death but in no event later than the
expiration of 10 years from the grant of such options. Options granted under
the 1994 Plan provide that in the event of a proposed sale of all or
substantially all of the Company's assets or a merger of the Company with or
into another corporation each outstanding option shall be assumed or an
equivalent option substituted for by the successor corporation. If the
successor corporation does not assume such option or substitute an equivalent
option, the option shall vest in its entirety and become fully exercisable. If
the option becomes fully exercisable in such case, the Board of Directors
shall notify such optionee and the option shall be exercisable for a period of
10 days from the date of such notice, and will terminate upon the expiration
of such period.
As of June 30, 1997, an aggregate of 133,138 Common Shares had been issued
upon exercise of options outstanding under the Stock Plans, and 7,000 Common
Shares had been issued to consultants outside of the Stock Plans. Options to
purchase an aggregate of 713,500 Common Shares at a weighted average exercise
price of $3.72 were outstanding under the Stock Plans as of June 30, 1997. As
of June 30, 1997, 303,362 Common Shares are available for issuance under
future option grants. No share purchase rights remain outstanding under the
1994 Plan.
55
<PAGE>
As of June 30, 1997, there were outstanding options under the Stock Plans
entitling the holders to acquire up to 713,500 Common Shares, all of which
expire 10 years from the date of grant, as set out below:
<TABLE>
<CAPTION>
EXERCISE MARKET VALUE MARKET VALUE OF
NUMBER OF PRICE PER OF SECURITIES SECURITIES
NAME OR DESCRIPTION COMMON SHARES COMMON OPTIONED AT OPTIONED AT
OF OPTION HOLDER DATE OF GRANT UNDER OPTION SHARE(1) DATE OF GRANT JUNE 30, 1997
- ---------------------- -------------- ------------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Executive Officers April 1994 40,000 Cdn.$1.35 Cdn.$1.35 Cdn.$8.50
(5 persons) July 1995 60,000 Cdn.$1.35 Cdn.$1.35 Cdn.$8.50
December 1996 120,000 Cdn.$5.00 Cdn.$5.00 Cdn.$8.50
April 1997 200,000 Cdn.$8.95 Cdn.$8.95 Cdn.$8.50
Directors February 1997 10,000 Cdn.$4.80 Cdn.$4.80 Cdn.$8.50
(1 person)
Employees who are not April 1994 188,000 Cdn.$1.38 Cdn.$1.38 Cdn.$8.50
Executive Officers or May 1996 13,000 Cdn.$7.00 Cdn.$7.00 Cdn.$8.50
Directors May 1997 22,500 Cdn.$9.75 Cdn.$9.75 Cdn.$8.50
June 1997 60,000 Cdn.$8.70 Cdn.$8.70 Cdn.$8.50
Total 713,500
</TABLE>
- --------
(1) The option agreements under the Company's Stock Plans provide for the
payment of the applicable exercise price in United States dollars. For all
options granted after May 1996, the exercise price is based on the fair
market value of the Company's Common Shares on the last business day
preceding the date of grant, as determined in trading on The Toronto Stock
Exchange and converted into U.S. dollars at the then-applicable exchange
rates.
401(k) Plan. Salix Pharmaceuticals participates in a tax-qualified employee
savings and retirement plan (the "401(k) Plan") which covers all of the
Company's full-time employees. Pursuant to the 401(k) Plan, employees may
elect to reduce their current compensation by up to the lower of 15% or the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) Plan. The Company makes matching contributions on
behalf of all participants in the 401(k) Plan in the amount of 25% of employee
contributions, provided, however, that for purposes of calculating such
matching contributions, the employee's contribution shall be treated as not
exceeding 6% of the employee's compensation. The Company may make additional
discretionary contributions on an annual basis. The 401(k) Plan is intended to
qualify under Section 401 of the Code so that contributions by employees or by
the Company to the 401(k) Plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the 401(k) Plan, and so that
contributions by the Company, if any, will be deductible by the Company when
made. The trustee under the 401(k) Plan, at the direction of each participant,
invests the assets of the 401(k) Plan in any of a number of investment
options.
EMPLOYMENT AGREEMENTS AND CHANGE IN CONTROL ARRANGEMENTS
The Company does not currently have any employment contracts in effect with
any Named Executive Officer.
Under the Stock Plans, in the event of a merger or a change in control of
the Company, under certain circumstances, vesting of options outstanding under
the Stock Plans will automatically accelerate such that outstanding options
will become fully exercisable, including with respect to shares for which such
shares would be otherwise unvested. See "Stock Plans".
56
<PAGE>
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Memorandum and Articles of
Association that eliminate to the fullest extent permissible under British
Virgin Islands law the liability of its directors to the Company for monetary
damages. Such limitation of liability does not affect the availability of
equitable remedies such as injunctive relief or rescission. The Company has
entered into indemnification agreements with its officers and directors
containing provisions which may require the Company, among other things, to
indemnify the officers and directors against certain liabilities that may
arise by reason of their status or service as directors or officers (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as
to which they could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of
any threatened litigation or proceeding which may result in a claim for such
indemnification.
57
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Shares as of June 30, 1997 and as
adjusted to reflect the sale of the 3,000,000 Common Shares offered by the
Company hereby: (i) by each person or entity who is known by the Company to
own beneficially more than 5% of the Common Shares; (ii) by each director of
the Company; (iii) by the Named Executive Officers; and (iv) by all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE TOTAL SHARES(/2/)
NUMBER OF SHARES ------------------------------
NAME AND ADDRESS(/1/) BENEFICIALLY OWNED BEFORE OFFERING AFTER OFFERING
- --------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Randy W. Hamilton(/3/)....... 1,038,982 14.6% 10.3%
Lorin K. Johnson(/4/)........ 745,693 10.4% 7.3%
David E. Lauck............... 300,000 4.2% 3.0%
Robert P. Ruscher(/5/)....... 39,435 * *
Lily Baxendale(/6/).......... 323,124 4.5% 3.2%
Lawrance A. Brown, Jr........ 37,668 * *
John F. Chappell(/7/)........ 879,494 12.3% 8.7%
Nicholas M. Ediger(/8/)...... 1,667 * *
All current executive
officers and directors
as a group (12
persons)(/9/)............... 3,429,396 47.0% 33.3%
</TABLE>
- ----------------
*Less than 1%.
(1) The address of each listed shareholder is c/o Salix Holdings, Ltd., 3600
West Bayshore Road, Suite 205, Palo Alto, California 94303.
(2) Applicable percentage ownership is based on 7,118,173 Common Shares
outstanding as of June 30, 1997 and 10,118,173 Common Shares outstanding
immediately following the completion of this offering, together with
applicable options for such shareholder. Beneficial ownership is
determined in accordance with the rules of the United States Securities
and Exchange Commission, based on factors including voting and investment
power with respect to shares, subject to community property laws, where
applicable. Common Shares subject to options or warrants currently
exercisable, or exercisable within 60 days after June 30, 1997, are deemed
outstanding for the purpose of computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding
for computing the percentage ownership of any other person. To the extent
that any shares are issued upon exercise of options, warrants, or other
rights to acquire the Company's share capital that are presently
outstanding or granted in the future or reserved for future issuance under
the Company's Stock Plans, there will be further dilution to new
investors.
(3) Includes 1,677 Common Shares issuable upon exercise of outstanding
warrants which are presently exercisable or will become exercisable within
60 days of June 30, 1997. Also includes 190,000 shares held by Mr.
Hamilton's spouse, for which Mr. Hamilton disclaims beneficial ownership.
(4) Includes 33,333 Common Shares issuable upon exercise of outstanding
warrants which are presently exercisable or will become exercisable within
60 days of June 30, 1997. Also includes 674,500 shares held by a trust for
the benefit of Dr. Johnson and his wife and 37,860 Common Shares held by a
family trust, the beneficiaries of which include Dr. Johnson's minor
children. Dr. Johnson's wife is the trustee of both trusts.
(5) Includes 35,000 Common Shares issuable upon exercise of outstanding
options and 833 Common Shares issuable upon exercise of outstanding
warrants, which are presently exercisable or will become exercisable
within 60 days of June 30, 1997.
(6) Represents 306,457 Common Shares held by Biorex Laboratories Limited and
16,667 Common Shares issuable upon exercise of outstanding warrants held
by Biorex Laboratories Limited which are presently exercisable or will
become exercisable within 60 days of June 30, 1997. Miss Baxendale is the
Managing Director and a co-founder of Biorex Laboratories Limited.
(7) Includes 10,000 Common Shares issuable upon exercise of outstanding
warrants which are presently exercisable or will become exercisable within
60 days of June 30, 1997.
(8) Represents 1,667 Common Shares issuable upon exercise of outstanding
options which are presently exercisable or will become exercisable within
60 days of June 30, 1997.
(9) Includes 100,000 Common Shares issuable upon exercise of outstanding
options and 70,833 Common Shares issuable upon exercise of outstanding
warrants which are presently exercisable or will become exercisable within
60 days of June 30, 1997.
58
<PAGE>
DESCRIPTION OF SHARE CAPITAL
GENERAL
The Company is authorized to issue 20,000,000 Common Shares, no par value,
and 5,000,000 undesignated Preferred Shares, no par value.
COMMON SHARES
As of June 30, 1997, there were 7,118,173 Common Shares outstanding held of
record by approximately 76 shareholders. As of June 30, 1997, options to
purchase an aggregate of 713,500 Common Shares and warrants to purchase an
aggregate of 602,331 Common Shares were also outstanding. See "Management--
Stock Plans".
The holders of Common Shares are entitled to one vote per share on all
matters to be voted on by shareholders and have cumulative voting rights with
respect to the election of directors. Subject to the prior rights of holders
of Preferred Shares, if any, the holders of Common Shares are entitled to
receive such dividends, if any, as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefor.
Upon liquidation or dissolution of the Company, the remainder of the assets of
the Company will be distributed ratably among the holders of Common Shares
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Shares. The Common Shares have no preemptive
or other subscription rights and there are no conversion rights or redemption
or sinking fund provisions with respect to such shares. All of the outstanding
Common Shares are, and the shares to be sold in this offering will be, fully
paid and nonassessable.
PREFERRED SHARES
The Company is authorized to issue 5,000,000 undesignated Preferred Shares.
The Board of Directors has the authority to issue the Preferred Shares in one
or more series and to fix the price, rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting a series or the designation
of such series, without any further vote or action by the Company's
shareholders. The issuance of Preferred Shares, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of delaying, deferring or preventing a change
in control of the Company without further action by the shareholders and may
adversely affect the market price of, and the voting and other rights of, the
holders of Common Shares. The Company has no current plans to issue any
Preferred Shares.
WARRANTS
As of June 30, 1997, there were outstanding warrants to purchase an
aggregate of 602,331 Common Shares at an exercise price of $3.00. Warrants to
purchase 399,999 Common Shares may be exercised at any time on or before the
earliest to occur of the following: (i) July 25, 2003 or (ii) the closing of
the Company's sale or acquisition of all or substantially all of its assets or
the acquisition of the Company by another entity by means of a merger or other
transaction the result of which is that shareholders of the Company
immediately prior to such acquisition possess a minority of the voting power
of the acquiring entity immediately following such acquisition (an
"Acquisition"). Warrants to purchase 202,332 Common Shares are exercisable at
any time on or before the earliest to occur of (i) January 17, 2000 or (ii) an
Acquisition. The warrants to purchase 399,999 Common Shares described above
include a net exercise provision that permits the holders to exercise the
warrant without payment of cash by surrendering the warrant and receiving
Common Shares equal to the value of the warrant surrendered in accordance with
a formula set forth in the warrants. The warrants to purchase 202,332 Common
Shares described above may be net exercised only following the Company's
delivery of notice of an Acquisition. All outstanding warrants contain
provisions for the adjustment of the exercise price and the aggregate number
of shares issuable upon exercise under certain circumstances, including share
dividends, share splits, reorganizations, reclassifications or consolidations.
59
<PAGE>
PRIOR SALES OF SECURITIES
The following table sets forth the particulars of prior sales of equity
securities of the Company since July 31, 1996 other than options granted and
the Common Shares offered hereby.
<TABLE>
<CAPTION>
NUMBER OF PRICE PER AGGREGATE
DATE OF ISSUE SECURITY SECURITIES SECURITY PROCEEDS
- ------------- -------- ---------- --------- --------------
<S> <C> <C> <C> <C>
August 1996 and February
1997(/1/).................. Common Shares 70,313 $1.00 $ 70,313
March and May 1997(/2/)..... Common Shares 200,000 Cdn.$7.00 Cdn.$1,400,000
</TABLE>
- --------
(1) Common Shares issued upon exercise of options to purchase Common Shares
under the Company's Stock Plans.
(2) Common Shares issued upon exercise of warrants to purchase Common Shares
granted to the underwriters in connection with the Canadian initial public
offering in May 1996.
60
<PAGE>
COMPARISON OF CANADIAN, UNITED STATES AND BRITISH VIRGIN ISLANDS CORPORATE
LAWS
Under the laws of many jurisdictions in the United States and Canada,
majority and controlling shareholders generally have certain "fiduciary"
responsibilities to the minority shareholders. Shareholder action must be
taken in good faith and actions by controlling shareholders which are
obviously unreasonable may be declared null and void. British Virgin Islands
law protecting the interests of minority shareholders may not be as protective
in all circumstances as the law protecting minority shareholders in
jurisdictions in the United States and Canada.
While British Virgin Islands law does permit a shareholder of a British
Virgin Islands corporation to sue its directors derivatively (i.e., in the
name of and for the benefit of the corporation) and to sue the corporation and
its directors for the shareholder's benefit and for the benefit of other
similarly situated, the circumstances in which any such action may be brought,
and the procedures and defenses that may be available in respect of any such
action, may result in the rights of shareholders of a British Virgin Islands
corporation being more limited than those of shareholders of a corporation
organized in the United States or Canada.
Directors of the Company have the power to take certain actions without
shareholder approval, including an amendment of the Company's Memorandum of
Association or Articles of Association or an increase or reduction in the
Company's authorized capital, which would require shareholder approval under
the laws of most jurisdictions in Canada and the United States. In addition,
the directors of a British Virgin Islands corporation, subject to court
approval but without shareholder approval (unless the court requires
shareholder approval), may, among other things, implement a reorganization;
certain mergers or consolidations; certain sales, transfers, exchanges or
dispositions of assets, property, parts of the business or securities of the
corporation; the winding-up or dissolution of the corporation, or any
combination thereof, if they determine any such action is in the best
interests of the corporation, its creditors, or its shareholders. The ability
of directors to commence a winding up of a company under British Virgin
Islands law may be restricted by the Company's Memorandum of Association and
Articles of Association so that a company that has issued shares may only
commence to wind-up and dissolve with the approval of the shareholders. In
addition, where there is a proposal to dispose of more than 50% of the assets
of a company (outside the ordinary course of business), British Virgin Islands
law requires shareholder consent to render such disposition valid.
As in most jurisdictions in the United States and Canada, the board of
directors of a British Virgin Islands corporation is charged with the
management of affairs of the corporation. In most jurisdictions in the United
States and Canada, directors owe a fiduciary duty to the corporation and its
shareholders, including a duty of care, pursuant to which directors must
properly apprise themselves of all reasonably available information, and a
duty of loyalty, pursuant to which they must protect the interests of the
corporation and refrain from conduct that injures the corporation or its
shareholders or that deprives the corporation or its shareholders of any
profit or advantage. Many U.S. and Canadian jurisdictions have enacted various
statutory provisions which permit the monetary liability of directors to be
eliminated or limited. Under British Virgin Islands law, the liability of a
corporate director to the corporation is limited to cases where the director
has not acted honestly and in good faith and with a view to the best interests
of the corporation or to cases where the director has not exercised the care,
diligence and skill that a reasonably prudent person would exercise in
comparable circumstances. Under its Articles of Association, the Company is
authorized to indemnify any person who is made or threatened to be made a
party to a legal or administrative proceeding by virtue of being a director,
officer or agent of the Company, provided such person acted honestly and in
good faith and with a view to the best interest of the Company and, in the
case of a criminal proceedings, such person had no reasonable cause to believe
that his conduct was unlawful. The Company's Articles of Association also
obligate the Company to indemnify any director, officer or agent of the
Company who was successful in any proceeding against expenses and judgments,
61
<PAGE>
fines and amounts paid in settlement and reasonably incurred in connection
with the proceeding, regardless of whether such person met the standard of
conduct described in the preceding sentence.
The foregoing description of certain differences between Canadian, United
States and British Virgin Islands corporate laws is only a summary and does
not purport to be complete or to address every applicable aspect of such laws.
APPLICABILITY OF CALIFORNIA LAW
Section 2115 of the California General Corporate Law (the "California
Corporate Law") makes substantial portions of the California Corporate Law
applicable, with limited exceptions, to foreign corporations (i.e., any
corporation domiciled outside the State of California) with more than half of
their outstanding capital stock held of record by persons having addresses in
California and more than half of the corporation's business conducted in the
State of California (as measured by factors based on the corporations levels
of property, payroll, and sales determined for California franchise tax
purposes). Although the Company is incorporated in the British Virgin Islands,
pursuant to Section 2115, certain provisions of the California Corporate Law
apply to the Company. The statutory provisions of the California Corporate Law
to which the Company is subject include, but are not limited to, provisions
governing a director's standard of care in performing the duties of a
director, the right of shareholders to vote cumulatively in the election of
directors, the right of a director or shareholder to inspect corporate
records, the ability of a corporation to indemnify officers, directors, and
others, and the corporate requirements to effect a corporate reorganization
(including mergers and acquisitions). Under Section 2115, the provisions of
the California Corporate law made applicable to a foreign corporation apply to
the exclusion of the law of the jurisdiction of incorporation of the foreign
corporation.
62
<PAGE>
CERTAIN TAX CONSIDERATIONS
The following is a general summary of certain British Virgin Islands,
Canadian and United States federal tax consequences of the purchase, ownership
and disposition of shares by prospective purchasers of Common Shares. This
summary is of a general nature only and prospective purchasers of Common
Shares are advised to consult their own tax advisors with respect to the tax
consequences, as well as with respect to the tax consequences in other
jurisdictions, of the ownership of Common Shares applicable in their
particular tax situations.
The summary set forth below is based on the laws in force and as interpreted
by the relevant taxation authorities as of the date of this Prospectus and are
subject to any changes in such law, or in the interpretation thereof by the
relevant taxation authorities, occurring after such date.
BRITISH VIRGIN ISLANDS TAXATION
At the present time, there is no British Virgin Islands income, corporation
or profits tax, withholding tax, capital gains tax, capital transfer tax,
estate duty or inheritance tax payable by the Company or its shareholders,
other than shareholders that are ordinarily resident in the British Virgin
Islands.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of the principal Canadian federal income
tax consequences under the Income Tax Act (Canada) (the "Canadian Act") to
purchasers of Common Shares pursuant to this offering who, for purposes of the
Canadian Act, are resident in Canada, deal at arm's length with the Company
and acquire and hold their Common Shares as capital property (a "Canadian
Holder"). The Canadian Act contains provisions relating to the tax
consequences to a taxpayer who holds shares in a "foreign affiliate" (the
"Foreign Affiliate Rules"). Generally, a "foreign affiliate" (as defined in
the Canadian Act) is a non-resident corporation in which the taxpayer owns at
least a 1% equity percentage and, either alone, or together with related
persons, owns at least a 10% equity percentage. The Canadian Act also contains
provisions relating to securities held by certain financial instructions (the
"Mark-to-Market Rules"). This summary does not take into account either the
Foreign Affiliate Rules or the Mark-to-Market Rules and Canadian Holders in
respect of which the Company is a "foreign affiliate" or that are "financial
institutions" should consult their own tax advisors.
This summary is based upon and takes into account the current provisions of
the Canadian Act, the regulations thereunder (the "Regulations"), all specific
proposals to amend the Canadian Act and the Regulations publicly announced by
the Minister of Finance prior to the date hereof (the "Amendments"), and the
Company's understanding of the current administrative practices published by
Revenue Canada. This summary does not otherwise take into account or
anticipate any changes in law, whether by judicial, governmental or
legislative decision or action, nor does it take into account tax laws or
considerations of any province or territory of Canada or any jurisdiction
outside Canada. Moreover, there can be no assurance that the Amendments will
be enacted as proposed or that the Canadian Act, the Regulations or
administrative practices of Revenue Canada, respectively, will not change in a
manner which will affect the tax consequences of the transactions to Canadian
Holders.
THIS SUMMARY IS OF A GENERAL NATURE ONLY, IS NOT EXHAUSTIVE OF ALL
POTENTIALLY RELEVANT CANADIAN FEDERAL INCOME TAX CONSIDERATIONS AND IS NOT
INTENDED TO BE, NOR SHOULD IT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY
PARTICULAR HOLDER OF COMMON SHARES. THEREFORE, SUCH PERSONS SHOULD CONSULT
THEIR OWN TAX ADVISERS WITH RESPECT TO THEIR PARTICULAR CIRCUMSTANCES.
Dividends Received on Common Shares
Dividends, if any, received by Canadian Holders on Common Shares must be
included in computing their income. Canadian Holders who are individuals will
not be entitled to the benefit of the gross-up and dividend tax credit rules
in the Canadian Act. Canadian Holders which are corporations will not be
entitled to deduct an amount in respect of such dividends in computing taxable
income.
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A refundable tax of 6 2/3% is payable on investment income earned by a
Canadian-controlled private corporation (as defined in the Canadian Act) which
tax will be refunded when the corporation pays taxable dividends (at a rate of
Cdn. $1.00 for every Cdn. $3.00 of taxable dividends paid). For this purpose,
investment income includes dividends on the Common Shares and a portion of any
taxable capital gain arising on a disposition of the Common Shares.
Disposition of Common Shares
A disposition or deemed disposition of a Common Share by a Canadian Holder
will give rise to a capital gain (or a capital loss) equal to the amount by
which the actual or deemed proceeds of disposition, less the reasonable costs
of disposition, exceed (or are exceeded by) the adjusted cost base of the
Common Share to the Canadian Holder at such time. Where a Canadian Holder who
holds previously acquired Common Shares acquires any Common Shares under this
offering all such shares will be considered to be identical properties for the
purposes of the Canadian Act. Accordingly, the cost of all such Common Shares
must be averaged for the purpose of determining their adjusted cost base to
the Canadian Holder.
Generally, three-quarters of any capital gain realized will be required to
be included in income as a taxable capital gain and three-quarters of any
capital loss will be deductible, subject to certain limitations, from taxable
capital gains in the year of disposition or the three preceding years or any
subsequent year.
Information Reporting
Certain Canadian Holders of Common Shares whose total cost amount (as
defined in the Canadian Act) of "specified foreign property" (as defined in
the Canadian Act), including the Common Shares, in a taxation year exceeds
Cdn. $100,000 will be required to file an information return in respect of
such specified foreign property. This reporting requirement applies for
taxation years commencing after 1995; however, information returns are not
required to be filed for the 1996, 1997 and 1998 taxation years before the
later of April 30, 1998 and the day on or before which the return for the
taxation year is otherwise required to be filed. Canadian Holders should
consult their own advisors with respect to the application of this reporting
requirement.
UNITED STATES FEDERAL INCOME TAXATION
The following discussion is applicable to prospective purchasers of the
Common Stock that are "U.S. Holders". For purposes of this discussion, a "U.S.
Holder" means an individual citizen or resident of the United States for
United States federal income tax purposes, a corporation or partnership
created or organized under the laws of the United States or any State thereof,
or an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
The following summary does not address the tax treatment of U.S. Holders who
own, actually or constructively, 10% or more of the Company's outstanding
voting stock and certain United States Holders (including, but not limited to,
insurance companies, tax-exempt organizations, financial institutions and
persons subject to the alternative minimum tax) who may be subject to special
rules not discussed below.
Taxation of Dividends. For United States federal income tax purposes, a U.S.
Holder receiving a distribution with respect to the Common Stock generally
will be required to include such distribution in gross income as a taxable
foreign source dividend to the extent such distribution is paid from current
or accumulated earnings and profits of the Company. Dividends received by
United States corporate shareholders will not be eligible for the dividends
received deduction allowed to United States corporations.
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Taxation of Capital Gains. Subject to the discussion below under the heading
"Passive Foreign Investment Company Considerations", a U.S. Holder will be
liable for United States federal income tax on gains realized from the sale,
exchange or other disposition of Common Stock to the same extent as on any
other gains from sales, exchanges or disposition of shares. If the Common
Stock constitutes a capital asset in the hands of the U.S. Holder, gain or
loss generally will be capital gain or loss.
Under the "Taxpayer Relief Act of 1997" (the "Taxpayer Act") the maximum
rate applicable to long-term capital gains of individuals has been reduced to
20%. However, the Taxpayer Act also extends the holding period for long-term
capital gains to 18 months for capital assets disposed of after July 28, 1997.
Gain on capital assets held between 12 months and 18 months are subject to tax
at a maximum rate of 28%.
Personal Holding Companies. A non-United States corporation may be
classified as a personal holding company (a "PHC") for United States federal
income tax purposes if both of the following two tests are satisfied: (i) if
at any time during the last half of the company's taxable year, five or fewer
individuals (without regard to their citizenship or residency) own or are
deemed to own (under certain attribution rules) more than 50% of the stock of
the corporation by value (the "PHC Ownership Test") and (ii) such non-United
States corporation receives 60% or more of its United States related gross
income, as specifically adjusted, from certain passive sources such as royalty
payments (the "PHC Income Test"). Such a corporation is taxed (currently at a
rate of 39.6%) on certain of its undistributed United States source income
(including certain types of foreign source income which are effectively
connected with the conduct of a United States trade or business) to the extent
amounts at least equal to such income are not distributed to shareholders.
The Company does not believe that it currently satisfies either the PHC
Ownership Test or the PHC Income Test and intends to manage its affairs so as
to avoid becoming a PHC, to the extent consistent with its business goals.
Foreign Personal Holding Companies. A non-United States corporation will be
classified as a foreign personal holding company (an "FPHC") for United States
federal income tax purposes if both of the two following tests are satisfied:
(i) five or fewer individuals who are United States citizens or residents own
or are deemed to own (under certain attribution rules) more than 50% of all
classes of the corporation's stock measured by voting power or value (the
"FPHC Ownership Test") and (ii) the corporation receives at least 60% (50% in
later years) of its gross income (regardless of source), as specifically
adjusted, from certain passive sources (the "FPHC Income Test").
If the Company is classified as an FPHC, a portion of its "undistributed
foreign personal holding company income" (as defined for United States federal
income tax purposes) would be imputed to all of its shareholders who are
United States holders of Common Shares on the last taxable day of the
Company's taxable year, or, if earlier, the last day on which it is classified
as an FPHC. Such income would be taxable as a dividend, even if no cash
dividend is actually paid. United States holders who dispose of their Common
Shares prior to such date would not be subject to tax under these rules.
The Company does not believe that it currently satisfies either the FPHC
Ownership Test or the FPHC Income Test and intends to manage its affairs so as
to avoid becoming a FPHC, to the extent consistent with its business goals.
Passive Foreign Investment Companies. The Company may be classified as a
passive foreign investment company ("PFIC") for United States federal income
tax purposes if certain tests are met. The Company will be a PFIC with respect
to a U.S. Holder if for any taxable year in which the U.S. held the Common
Stock either (i) 75% or more of its gross income is passive income or (ii) on
average for the taxable year, 50% or more of its assets (by value or, if the
Company so elects, by adjusted basis) produce or are held for the production
of passive income.
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Based on the anticipated sources of revenue of the Company in 1997, the
Company does not believe that it will satisfy either of the tests for PFIC
status for the taxable year ended December 31, 1997. However, there can be no
assurance that the Internal Revenue Service will not challenge the Company's
determination. In addition, because the determination of whether the Common
Shares constitutes shares of a PFIC will be based upon the nature of the
income and assets of the Company from time to time, there can be no assurance
that the Company will not be considered a PFIC for any future taxable year. If
the Company is a PFIC for any taxable year, U.S. Holders would be required to
either (i) pay an interest charge together with tax calculated at maximum
ordinary income rates on certain "excess distributions" (defined to include
gain on a sale or other disposition of Common Shares) or (ii) if a Qualified
Electing Fund ("QEF") election is made, to include in their taxable income
certain undistributed amounts of the Company's income. Each U.S. Holder should
consult its own tax advisor regarding the advisability of making the QEF
election.
United States Information Reporting and Backup Withholding. Generally the
amount of dividends paid to U.S. Holders of Common Shares, the name and
address of the recipient and the amount if any, of tax withheld must be
reported annually to the Internal Revenue Service. A similar report is sent to
the holder.
Backup withholding tax at the rate of 31% will apply to certain payments
made to U.S. Holders who fail to furnish certain identifying information under
the United States information reporting rules. Amounts withheld from payments
will be allowed as a credit against such U.S. Holders' United States Federal
income tax liability.
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SHARES ELIGIBLE FOR FUTURE SALE
Although the Common Shares offered hereby will be registered for sale under
the United States Securities Act of 1933, as amended (the "U.S. Securities
Act"), there is no public trading market for the Common Shares of the Company
in the United States. After this offering, the 3,000,000 Common Shares offered
hereby will trade only in Canada on The Toronto Stock Exchange under the
symbol "SLX". No prediction can be made regarding the effect, if any, that
market sales of Common Shares or the availability of Common Shares for sale
will have on the prevailing market price of the Common Shares from time to
time. As described below, certain outstanding Common Shares are subject to
contractual and legal restrictions on resale. Sales of substantial amounts of
Common Shares in the public market after the restrictions lapse could
adversely affect the prevailing market price of the Company's securities on
The Toronto Stock Exchange.
Upon completion of this offering, the Company will have approximately
10,118,173 Common Shares outstanding (assuming no exercise of the
Underwriters' over-allotment option). Of these shares, all of the 3,000,000
Common Shares sold in this offering will be freely tradeable in the United
States without restriction (unless such shares are held by an "affiliate" of
the Company as such term is defined in the U.S. Securities Act). An additional
2,200,000 Common Shares were issued in connection with the Company's initial
public offering in Canada in May 1996 (the "Canadian IPO"). The Common Shares
issued in the Canadian IPO and all other outstanding Common Shares available
for resale under applicable securities laws currently trade on The Toronto
Stock Exchange under the symbol "SLX.s", carry a legend reflecting the
Company's reliance, in connection with the Canadian IPO, on the exemption from
the registration requirements of the U.S. Securities Act set forth in
Regulation S thereunder, and are not presently available for resale in the
United States or to "U.S. Persons" (as defined in Regulation S) in the absence
of an exemption from registration under the U.S. Securities Act. It is the
Company's current intention to authorize the removal of the Regulation S
legend from all shares currently bearing such legend on May 28, 1998. After
May 28, 1998, all shares that are then freely tradeable on The Toronto Stock
Exchange will trade under the symbol "SLX". Prior to May 28, 1998,
shareholders may request that the Company remove applicable legends in
connection with resales on The Toronto Stock Exchange, subject to the
shareholder's ability to establish, to the satisfaction of the Company and its
legal counsel, that such shares may be resold in the United States in
compliance with the requirements of the U.S. Securities Act. Following removal
of the legend, such Common Shares will be freely tradeable in the United
States without restriction or further registration under the U.S. Securities
Act (except for shares that are held by an affiliate of the Company as that
term is defined in Rule 144 under the U.S. Securities Act).
Of the 7,118,173 Common Shares outstanding prior to the completion of this
offering, except for shares purchased by affiliates of the Company, (i) the
2,200,000 Common Shares issued in connection with the Canadian IPO and
approximately 500,000 Common Shares issued in other transactions will be
available for resale in accordance with Regulation S at any time on The
Toronto Stock Exchange, subject to the legend removal conditions set forth
above, and (ii) approximately 1,165,000 Common Shares will be available for
resale only in compliance with Rule 144(k) or another exemption under the U.S.
Securities Act. Approximately 3,259,000 Common Shares are held by affiliates
of the Company and are subject to additional legal and contractual
restrictions on resale. See "Risk Factors--Price Volatility; Limited Trading
Volume".
Outstanding Common Shares will generally be available for resale pursuant to
Rule 144(k) under the U.S. Securities Act if the holder is not an affiliate of
the Company and has held the Common Shares for at least two years (including
the holding period of any prior holder other than an affiliate) from the later
to occur of the date on which the shares were purchased or the date on which
the purchaser paid the full consideration for the shares. In general, under
Regulation S as currently in effect, outstanding Common Shares issued and sold
by the Company in reliance on the exemption under Regulation S will be
eligible for legend removal and resale in the United States or to U.S. Persons
if the Common Shares have been held for at least one year from the date of
purchase in a transaction meeting the requirements of
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Regulation S. The United States Securities and Exchange Commission (the "SEC")
is currently evaluating a proposal that would, among other things, classify
all equity securities of domestic issuers placed offshore under Regulation S
as "restricted securities" under Rule 144 of the U.S. Securities Act. Such a
proposal, if adopted, would reinforce the SEC's current view that any person
who would be considered an "underwriter" within the meaning of the U.S.
Securities Act may not resell securities sold in reliance on Regulation S
following expiration of the applicable Regulation S restricted period in the
absence of registration or an exemption therefrom. In particular, such persons
may not assume the availability of the exemption set forth in Section 4(1) of
the U.S. Securities Act with respect to resales of securities in the United
States or to U.S. Persons. The Company's decision to refrain from removing any
Regulation S legend on the Common Shares prior to May 28, 1998 except upon
satisfaction of the conditions described above is subject to change in the
event of further regulation or guidance from the SEC.
In connection with the completion of this offering, Biorex and certain
executive officers and directors of the Company holding 3,035,626 Common
Shares are expected to agree with the Underwriters not to sell, transfer, or
assign any Common Shares or any securities convertible or exercisable or
exchangeable for Common Shares, held or controlled, directly or indirectly, by
such shareholders, without the prior written consent of Levesque Beaubien
Geoffrion Inc. on behalf of the Underwriters, which consent will not be
unreasonably withheld, for a period of 90 days following the anticipated
closing date of the offering. The Company has agreed to a similar 90-day
restriction with respect to the issuance of new Common Shares. The Company
may, however, grant options to purchase Common Shares pursuant to the Stock
Plans and may issue Common Shares pursuant to the exercise of granted options
and outstanding warrants, as well as in connection with licensing arrangements
or other acquisitions by the Company of assets or rights in the ordinary
course of business.
OPTIONS
As of June 30, 1997, options to purchase 713,500 Common Shares were
outstanding, of which options to purchase approximately 264,111 Common Shares
were then vested and exercisable. In addition, 133,138 Common Shares were
issued and outstanding under the Stock Plans, and an additional 7,000 Common
Shares had been issued to consultants outside of the Stock Plans. Concurrently
with the effectiveness of the offering contemplated by this Prospectus, the
Company intends to file a Registration Statement on Form S-8/S-3 covering the
1,150,000 Common Shares reserved for issuance under the Stock Plans and
covering for resale approximately 1,960,000 Common Shares issued under the
Stock Plans or to consultants outside of the Stock Plans and pursuant to
founders' Stock Purchase Agreements.
ESCROWED SHARES
Pursuant to an escrow agreement dated May 10, 1996, among Randy W. Hamilton,
Lorin K. Johnson, David E. Lauck, John F. Chappell and Biorex (collectively,
the "Escrowed Shareholders"), the Company and Montreal Trust Company of Canada
(the "Escrow Agent"), 2,747,753 Common Shares (the "Escrowed Shares") were
placed in escrow by the Escrowed Shareholders. The Escrowed Shares are subject
to release from escrow as follows: 10% of the Escrowed Shares were released
nine months after May 17, 1996, (the date of the issuance by the securities
regulatory authorities in the applicable provinces of a receipt for the
Prospectus relating to the Company's initial public offering of shares in
Canada (the "Initial Release Date"); a further 20% of the Escrowed Shares will
be released on each of the first, second and third anniversaries of the
Initial Release Date; and 30% of the Escrowed Shares will be released on the
fourth anniversary date of the Initial Release Date.
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PLAN OF DISTRIBUTION
Pursuant to an underwriting agreement (the "Underwriting Agreement") dated
, 1997 between the Company and Levesque Beaubien Geoffrion Inc., Yorkton
Securities Inc., Marleau, Lemire Securities Inc. and Midland Walwyn Capital
Inc. (collectively, the "Underwriters"), the Company has agreed to issue and
sell and the Underwriters have severally agreed to purchase on , 1997, or on
such other date, not later than , 1997, as may be agreed upon, subject to
the terms and conditions stated therein, the number of Common Shares (the
"Offered Shares") set forth opposite their names below at a price of Cdn.$
per Common Share, payable against delivery of certificates for such Common
Shares. The Company has agreed to pay the Underwriters a fee of Cdn.$ per
share for their services in connection with this offering.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Levesque Beaubien Geoffrion Inc. .................................
Yorkton Securities Inc. ..........................................
Marleau, Lemire Securities Inc. ..................................
Midland Walwyn Capital Inc. ......................................
---------
Total............................................................ 3,000,000
=========
</TABLE>
The Underwriters will offer the Offered Shares in Canada and elsewhere
outside the United States, and, through their respective United States broker-
dealer affiliates, in the United States. The respective United States broker-
dealer affiliates of the Underwriters are NBC Levesque International Ltd.,
Yorkton Capital Inc., Marleau Lemire (USA), Inc., and Midland Walwyn Capital
Corporation.
The obligations of the Underwriters under the Underwriting Agreement are
several and may be terminated at their discretion on the basis of their
assessment of the state of the financial markets and may also be terminated
upon the occurrence of certain stated events. If any of the Offered Shares are
purchased pursuant to the Underwriting Agreement, the Underwriters will be
obligated to take up and pay for all of the Offered Shares.
Pursuant to policy statements of the Ontario Securities Commission and the
Commission des valeurs mobilieres du Quebec, the Underwriters may not, during
the period of distribution under this Prospectus, bid for or purchase Common
Shares. The foregoing restriction is subject to certain exceptions, as long as
the bid of purchase is not engaged in for the purpose of creating actual or
apparent active trading in or raising the market price of the Common Shares.
These exceptions include a bid or purchase permitted under the rules and by-
laws of The Toronto Stock Exchange relating to market stabilization and
passive market making activities and a bid or purchase made for and on behalf
of a customer where the order was not solicited during the period of
distribution. Pursuant to the first mentioned exception, in connection with
this offering, the Underwriters may over-allot or effect transactions which
stabilize or maintain the market price of the Common Shares at levels other
than those which otherwise might prevail on the open market. Such transactions
may be commenced or interrupted at any time during the period of distribution.
The Underwriters have further advised the Company that, pursuant to
Regulation M under the U.S. Securities Act, certain persons participating in
the offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of Common Shares at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Shares on behalf
of the Underwriters for the purpose of fixing or maintaining the price of the
Common Shares. A "syndicate covering transaction" is the bid for or the
purchase of the Common Shares on behalf of the Underwriters to reduce a short
position incurred by the Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the Underwriters to reclaim the
selling concession
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otherwise accruing to an Underwriter or syndicate member in connection with
the offering if the Common Shares originally sold by such Underwriter or
syndicate member is purchased by the Underwriters in a syndicate covering
transaction and has therefore not been effectively placed by such Underwriter
or syndicate member. The Underwriters have advised the Company that such
transactions may be effected on The Toronto Stock Exchange or otherwise and,
if commenced, may be discontinued at any time.
The Company has granted to the Underwriters, an option, exercisable during
the 60-day period following the date of closing of this offering, to purchase
up to 450,000 additional Common Shares at the price set forth on the front
cover page of this Prospectus payable in cash to the Company against delivery
of the certificates representing those Common Shares, to cover over-
allotments, if any. Such option may be exercised in whole or in part at any
time until the close of business on the 60th day after the date of the closing
of this offering. The Company has agreed to pay the Underwriters a fee of
Cdn.$ per Common Share in respect of such additional Common Shares. The
Common Shares received by the Underwriters on exercise of the over-allotment
option will be qualified in Canada by this Prospectus and registered in the
United States pursuant to the registration statement of which this Prospectus
forms a part.
In connection with the completion of this offering, Biorex and certain
executive officers and directors of the Company holding 3,035,626 Common
Shares are expected to agree with the Underwriters not to sell, transfer, or
assign any Common Shares or any securities convertible or exercisable or
exchangeable for Common Shares, held or controlled, directly or indirectly, by
such shareholders, without the prior written consent of Levesque Beaubien
Geoffrion Inc. on behalf of the Underwriters, which consent will not be
unreasonably withheld, for a period of 90 days following the anticipated
closing date of the offering. The Company has agreed to a similar 90-day
restriction with respect to the issuance of new Common Shares. The Company
may, however, grant options to purchase Common Shares pursuant to the Stock
Plans and may issue Common Shares pursuant to the exercise of granted options
and outstanding warrants, as well as in connection with licensing arrangements
or other acquisitions by the Company of assets or rights in the ordinary
course of business.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the U.S. Securities Act and under
Canadian securities legislation, and to contribute to payments that the
Underwriters may be required to make in respect thereof.
The Underwriters have advised the Company that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority in
excess of 5% of the number of Common Shares offered hereby.
Purchasers are required to pay for the Common Shares in Canadian dollars.
The Underwriters have arranged, subject to applicable laws or regulations, for
the conversion of United States dollars into Canadian dollars to enable United
States purchasers to pay for the Common Shares. Such conversion will be made
by the Underwriters on such terms and subject to such conditions, limitations
and charges as the Underwriters establish in accordance with their foreign
exchange practices. All costs of exchange will be borne by the purchasers of
the Common Shares.
The foregoing summarizes the material terms of the Underwriting Agreement
and is qualified in its entirety by the Underwriting Agreement.
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LEGAL MATTERS
Certain legal matters relating to the distribution of the Common Shares in
Canada will be passed upon for the Company by Aird & Berlis, Barristers and
Solicitors, Toronto, Ontario and for the Underwriters by McCarthy Tetrault,
Barristers and Solicitors, Toronto, Ontario.
The validity of the Common Shares offered hereby will be passed upon for the
Company by Harney, Westwood and Riegels, Road Town, Tortola, British Virgin
Islands. Certain U.S. legal matters in connection with this offering will be
passed upon for the Company by Wilson Sonsini Goodrich & Rosati, P.C., Palo
Alto, California and for the Underwriters by Skadden, Arps, Slate, Meagher &
Flom LLP, Toronto, Ontario.
AUDITORS
The consolidated financial statements of the Company at December 31, 1995
and 1996 and for each of the five years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts
in accounting and auditing.
TRANSFER AGENT
The transfer agent for the Common Shares is Montreal Trust Company of
Canada, at its principal offices in Toronto, Ontario and Vancouver, British
Columbia.
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MATERIAL CONTRACTS
Except as indicated below, each of the following contracts is material to
the Company's business and has been filed as an exhibit to the Company's
Registration Statement on Form S-1 with the SEC in accordance with the rules
and regulations of the SEC. In addition, the material contracts identified in
items 1 through 3 below were entered into outside the ordinary course of the
Company's business within the prior two years and are required to be disclosed
and made available to Canadian investors in accordance with the rules of
certain Canadian securities regulators:
1. Underwriting Agreement dated as of , 1997 by and among the Company,
Levesque Beaubien Geoffrion Inc., Yorkton Securities Inc., Marleau,
Lemire Securities Inc., and Midland Walwyn Capital Inc;
2. Agency Agreement dated May 15, 1996 among the Company and Haywood
Securities Inc., Dlouhy Investments Inc., and Moss, Lawson & Co.
Limited;+
3. Warrant Indenture between the Company and the Trustee, dated as of
January 12, 1996;+
4. Form of Indemnification Agreement between the Company and each of its
officers and directors;
5. Form of 1994 Stock Plan for Salix Holdings, Ltd. and form of Stock
Option and Restricted Stock Purchase Agreements thereunder;
6. Form of 1996 Stock Plan for Salix Holdings, Ltd. and form of Stock
Option Agreement thereunder;
7. Amendment Agreement effective as of September 17, 1992 by and among
Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex
Laboratories Limited;*
8. License Agreement dated September 17, 1992, between Biorex Laboratories
Limited and Glycyx Pharmaceuticals, Limited, and letter agreement
amendments thereto;*
9. Research and Development Agreement dated September 21, 1992 between
Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement
amendments thereto;*
10. Distribution Agreement dated September 21, 1992 between Glycyx
Pharmaceuticals, Ltd. and AB Astra;*
11. Amended and Restated License Agreement by and between Salix
Pharmaceuticals, Inc. and Biorex Laboratories Limited, dated April 16,
1993;*
12. Co-Participation Agreement dated April 30, 1993, between Salix
Pharmaceuticals, Inc. and AB Astra, as amended by Amendment No. 1
thereto, effective September 30, 1993;*
13. Manufacturing Agreement dated September 15, 1993 between Courtaulds
Chemicals (Holdings) Limited and Glycyx Pharmaceuticals, Ltd.;*
14. Distribution Agreement dated September 23, 1994, between Glycyx
Pharmaceuticals, Ltd, and Menarini International Operations Luxembourg
SA and amendments thereto;*
15. License Agreement dated June 24, 1996 between Alfa Wassermann S.p.A. and
Salix Pharmaceuticals, Inc.;*
16. Supply Agreement dated June 24, 1996 between Alfa Wassermann S.p.A. and
Salix Pharmaceuticals, Inc.;* and
17. Forms of Warrant issued by the Company January 17, 1995 and July 25,
1995.
- --------
+ This agreement has not been filed with the SEC.
* Confidential treatment has been requested with respect to certain portions
of this agreement pursuant to a request for confidential treatment filed
with the SEC. Portions omitted from the Company's SEC filing have been
submitted separately to the SEC.
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Copies of each of the foregoing agreements filed with the SEC are available
on the SEC's worldwide web site at http://www.sec.gov, at the offices of the
SEC, and at the offices of the National Association of Securities Dealers,
Inc. See "Additional Information". Copies of the agreements numbered 1-3
above, being material contracts entered into outside the ordinary course of
the Company's business within the prior two years, will be made available to
Canadian investors during normal business hours at any time during the period
of the distribution of the Common Shares offered by this Prospectus and for a
period of 30 days thereafter at the offices of Aird & Berlis, Barristers and
Solicitors, BCE Place, Suite 1800, Box 754, 181 Bay Street, Toronto, Ontario
M5J 2T9.
CANADIAN PURCHASERS' STATUTORY RIGHTS
Securities legislation in certain of the provinces of Canada provides
purchasers with the right to withdraw from an agreement to purchase securities
within two business days after receipt or deemed receipt of a prospectus and
any amendment. In several of the provinces, securities legislation further
provides a purchaser with remedies for rescission or, in some jurisdictions,
damages where the prospectus and any amendment contains a misrepresentation or
is not delivered to the purchasers, but such remedies must be exercised by the
purchaser within the time limit prescribed by the securities legislation of
his or her Province. The purchaser should refer to the applicable provisions
of the securities legislation of his or her Province for the particulars of
these rights or consult with a legal advisor.
ADDITIONAL INFORMATION
The Company has filed with the SEC a Registration Statement on Form S-1 (the
"Registration Statement") under the U.S. Securities Act, with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Shares, reference is made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus as to the contents of any contract or any other document referred
to are not necessarily complete. In each instance, reference is made to the
copy of such contract or document filed as an exhibit to the Registration
Statement, and each such statement is qualified in all respects by such
reference. The Registration Statement, including exhibits and schedules
thereto, may be inspected without charge at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the regional offices of the SEC located at Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials may be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates and through the National
Association of Securities Dealers, Inc. located at 1735 K Street, N.W.,
Washington, D.C. 20006. The SEC maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the SEC's
Web site is http://www.sec.gov.
73
<PAGE>
GLOSSARY
4-ABA................... 4 aminobenzoyl alanine, the carrier molecule in
Colazide.
5-ASA................... 5-aminosalicylic-acid, the active ingredient in
Colazide and some other Inflammatory Bowel Disease
drugs.
Acute ulcerative
colitis................ An acute episode of ulcerative colitis often associated
with diarrhea, rectal bleeding and abdominal pain.
Antibiotic.............. An agent that kills microorganisms or suppresses their
multiplication or growth.
Antibiotic associated
colitis (AAC).......... An acute inflammatory bowel disorder associated with
antibiotic use.
C. difficile............ Clostridium difficile, a bacterium that is associated
with certain infectious gastrointestinal diseases.
Balsalazide............. The generic name for the Company's initial licensed
inflammatory bowel disease product, of which the first
drug developed therefrom is balsalazide disodium.
Chronic ulcerative
colitis................ See Ulcerative Colitis.
Colazide................ Trade name of the Company's initial licensed and
developed drug, balsalazide disodium.
Colectomy............... Surgical removal of the entire colon.
Colonic Polyps ......... Polyps occurring in the colon.
Corticosteriods......... Any of the steroid chemical compounds produced by the
adrenal cortex, or their synthetic equivalents.
Crohn's disease......... A disease characterized by chronic inflammation of the
colon, small intestine, and gastrointestinal tract,
often associated with diarrhea, rectal bleeding and
abdominal pain.
Diverticular disease.... Sacs or pouches of variable size created by herniations
of the inner lining of the colon through defects in the
outer muscular wall of the colon.
Diverticulitis.......... Inflammation of a diverticulum which may undergo
perforation and abscess formation.
Familial adenomatous
polyposis (FAP)........ A hereditary condition associated with the rapid
development of vast numbers of colonic polyps.
FDA..................... The United States Food and Drug Administration.
Good Clinical Practice
(GCP).................. Good Clinical Practice regulations--the minimum
standards as set by the FDA required in the conduct and
monitoring of clinical trials to ensure the protection
of the rights and safety of subjects.
Good Manufacturing
Practice (GMP)......... Good Manufacturing Practice regulations--the minimum
standards as set by the FDA required for the
manufacture, processing, packaging or holding of a drug
to ensure that the drug meets the requirements of
safety, identity, strength, quality and purity.
74
<PAGE>
Hepatic encephalopathy.. A neuropsychiatric syndrome due to liver disease.
H. pylori............... Helicobacter pylori, the bacterium that is believed to
be the underlying cause of most peptic ulcers.
Immunosuppressive
drugs.................. Drugs that artificially prevent or diminish the body's
immune response; can be used to prevent organ
transplant rejection and to treat certain inflammation
disease.
Investigational New Drug
(IND).................. Investigational New Drug application--the application
required in order to conduct clinical trials with an
investigational drug in the United States.
Inflammatory Bowel
Disease (IBD).......... A collective term for two chronic diseases of the
gastrointestinal tract: ulcerative colitis and Crohn's
disease.
Infectious diarrhea..... Increased volume, fluidity or frequency of bowel
movements caused by the presence of pathogenic
bacteria in the gastrointestinal tract.
MCA..................... The Medicines Control Agency, an administrative agency
regulating the marketing of pharmaceutical products in
the United Kingdom.
New Drug Application
(NDA).................. An application requesting approval from the FDA to
market a drug in the United States.
NSAIDs.................. Non-steroidal anti-inflammatory drugs.
Peptic ulcer............ An erosion of the lining of the stomach, esophagus, or
duodenum (upper portion of the small bowel) caused by
the action of stomach acids.
Perioperative
prophylaxis............ Measures taken before, during and immediately after a
surgical procedure to prevent or minimize the
infection of a surgical wound.
Polyp................... Benign or cancerous growths, protruding from a mucous
membrane.
Polypectomy............. Surgical removal of polyps from the colon.
Rifaximin .............. The generic name for a broad spectrum, bactericidal,
semi-synthetic antibiotic used to treat various
gastrointestinal infections.
Rifamycin class of
antibiotics............ A class of antibiotics with broad spectrum
antibacterial activity.
Sulfasalazine........... The original azo-bonded, 5-ASA-containing therapeutic
used to treat ulcerative colitis.
Ulcerative colitis...... A disease characterized by chronic inflammation of the
colon, often associated with diarrhea, rectal bleeding
and abdominal pain.
75
<PAGE>
SALIX HOLDINGS, LTD.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FIVE YEARS ENDED
DECEMBER 31, 1996
Report of Independent Auditors........................................... F-2
Consolidated Balance Sheets.............................................. F-3
Consolidated Statements of Operations.................................... F-4
Consolidated Statement of Shareholders' Equity (Net Capital Deficiency).. F-5
Consolidated Statements of Cash Flows.................................... F-6
Notes to Consolidated Financial Statements............................... F-7
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 1997 AND 1996
Condensed Consolidated Balance Sheets.................................... F-17
Condensed Consolidated Statements of Operations.......................... F-18
Condensed Consolidated Statement of Shareholders' Equity................. F-19
Condensed Consolidated Statements of Cash Flows.......................... F-20
Notes to Condensed Consolidated Financial Statements..................... F-21
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Salix Holdings, Ltd.
We have audited the accompanying consolidated balance sheets of Salix
Holdings, Ltd. as of December 31, 1996 and 1995 and the related consolidated
statements of operations, shareholders' equity (net capital deficiency), and
cash flows for each of the five years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Salix
Holdings, Ltd. at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the five years in the period
ended December 31, 1996, in conformity with accounting principles generally
accepted in the United States.
(Signed) Ernst & Young LLP
Palo Alto, California
March 18, 1997
F-2
<PAGE>
SALIX HOLDINGS, LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 2)......................... $ 5,624 $ 188
Other current assets....................................... 79 34
------- -------
Total current assets..................................... 5,703 222
Property and equipment, net (Note 2)......................... 145 179
Other assets................................................. 10 32
------- -------
$ 5,858 $ 433
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable........................................... $ 667 $ 881
Secured promissory note.................................... -- 363
Accrued salaries........................................... -- 297
Other current liabilities.................................. 43 328
Advances from licensees (Note 6)........................... -- 1,186
Unearned revenue (Note 6).................................. -- 599
Amount due licensor (Note 5)............................... 555 --
------- -------
Total current liabilities................................ 1,265 3,654
Convertible unsecured promissory notes (Note 10)............. -- 607
Unsecured promissory notes (Note 10)......................... -- 1,200
Accrued interest............................................. -- 98
Amount due to licensor (Note 5).............................. -- 100
Commitments (Note 7)
Shareholders' equity (net capital deficiency) (Note 8):
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; 466,445 convertible preferred
shares, issued and outstanding at December 31, 1995 (none
at December 31, 1996)..................................... -- 845
Common stock, no par value; 20,000,000 and 15,000,000
shares authorized at December 31, 1996 and 1995,
respectively; 6,858,173 shares and 3,150,965 shares issued
and outstanding at December 31, 1996 and 1995,
respectively.............................................. 13,194 79
Accumulated deficit........................................ (8,601) (6,150)
------- -------
Shareholders' equity (net capital deficiency)............ 4,593 (5,226)
------- -------
$ 5,858 $ 433
======= =======
</TABLE>
ON BEHALF OF THE BOARD:
(Signed) LAWRANCE A. BROWN, JR. (Signed) NICHOLAS M. EDIGER
Director Director
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
SALIX HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenues:
License revenue (Note 6)......... $ 1,186 $ -- $ -- $1,000 $ 1,712
Revenue from collaborative
agreements (Note 6)............. 634 1,990 2,827 3,439 1,212
------- ------- ------- ------ -------
Total revenues................. 1,820 1,990 2,827 4,439 2,924
------- ------- ------- ------ -------
Expenses:
License fees (Note 5)............ 605 100 -- -- --
Research and development (Note
2).............................. 2,053 2,888 3,199 4,321 3,539
General and administrative....... 1,731 1,334 1,125 873 408
------- ------- ------- ------ -------
Total expenses................. 4,389 4,322 4,324 5,194 3,947
------- ------- ------- ------ -------
Loss from operations............... (2,569) (2,332) (1,497) (755) (1,023)
Interest income.................... 290 18 48 48 15
Interest expense................... (172) (106) (3) (7) (3)
------- ------- ------- ------ -------
Net loss....................... $(2,451) $(2,420) $(1,452) (714) (1,011)
======= ======= ======= ====== =======
Net loss per share................. $ (0.46) $ (0.77) $ (0.46) $(0.23) $ (0.38)
======= ======= ======= ====== =======
Shares used in computing net loss
per share......................... 5,365 3,149 3,144 3,144 2,688
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
SALIX HOLDINGS, LTD.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PREFERRED SHAREHOLDERS'
STOCK COMMON STOCK NOTE EQUITY
--------- ----------------- RECEIVABLE ACCUMULATED (NET CAPITAL
AMOUNTS SHARES AMOUNTS FROM OFFICER DEFICIT DEFICIENCY)
--------- --------- ------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1991................... $ 395 1,207,500 $ 32 $ -- $ (553) $ (126)
Issuance of Salix
common stock for cash
and notes receivable.. -- 131,260 26 (11) -- 15
Issuance of Salix
Series C preferred
stock for cash........ 450 -- -- -- -- 450
Issuance of Glycyx
common stock for
cash.................. -- 1,805,205 14 -- -- 14
Net loss............... -- -- -- -- (1,011) (1,011)
----- --------- ------- ----- ------- -------
Balance at December 31,
1992................... 845 3,143,965 72 (11) (1,564) (658)
Net loss............... -- -- -- -- (714) (714)
----- --------- ------- ----- ------- -------
Balance at December 31,
1993................... 845 3,143,965 72 (11) (2,278) (1,372)
Repayment of note
receivable............ -- -- -- 11 -- 11
Net loss............... -- -- -- -- (1,452) (1,452)
----- --------- ------- ----- ------- -------
Balance at December 31,
1994................... 845 3,143,965 72 -- (3,730) (2,813)
Issuance of common
stock................. -- 7,000 7 -- -- 7
Net loss............... -- -- -- -- (2,420) (2,420)
----- --------- ------- ----- ------- -------
Balance at December 31,
1995................... 845 3,150,965 79 -- (6,150) (5,226)
Issuance of common
stock for conversion
of debentures,
including accrued
interest.............. -- 1,167,625 3,503 -- -- 3,503
Issuance of common
stock for conversion
of Series A, B and C
convertible preferred
stock................. (845) 466,445 845 -- -- --
Issuance of common
stock in connection
with the Company's
initial public
offering of
securities, net of
issuance costs of
$1,473................ -- 2,000,000 8,694 -- -- 8,694
Issuance of common
stock upon exercise of
stock options......... -- 73,138 73 -- -- 73
Net loss............... -- -- -- -- (2,451) (2,451)
----- --------- ------- ----- ------- -------
Balance at December 31,
1996................... $ -- 6,858,173 $13,194 $ -- $(8,601) $ 4,593
===== ========= ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
SALIX HOLDINGS, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss.......................... $(2,451) $(2,420) $(1,452) $ (714) $(1,011)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Depreciation and amortization.... 55 59 42 27 2
Changes in assets and
liabilities:
Refundable income tax........... -- -- 130 (130) --
Other current assets and other
assets......................... (22) (37) 72 (81) (13)
Accounts payable and other
current liabilities............ (673) 1,223 (27) 459 172
Advances from licensees......... (1,186) 910 -- 76 200
Unearned revenue................ (599) (1,687) 94 1,133 1,059
Amount due licensor............. 555 -- -- -- --
------- ------- ------- ------ -------
Net cash provided by (used in)
operating activities.......... (4,321) (1,952) (1,141) 770 409
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchases of property and
equipment........................ (21) (3) (93) (148) (64)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from issuance of
convertible promissory notes..... -- 607 -- -- --
Proceeds from issuance of
promissory notes................. -- 1,200 -- -- --
Proceeds from issuance of
convertible debentures........... 1,375 -- -- -- --
Proceeds from issuance of
convertible preferred stock...... -- -- -- -- 450
Proceeds from issuance of common
stock............................ 8,767 7 -- -- 29
Repayment of note receivable from
officer.......................... -- -- 11 -- --
Payments of principal on secured
promissory note.................. (364) -- -- -- --
------- ------- ------- ------ -------
Net cash provided by financing
activities.................... 9,778 1,814 11 -- 479
------- ------- ------- ------ -------
Net increase (decrease) in cash and
cash equivalents.................. 5,436 (141) (1,223) 622 824
Cash and cash equivalents at
beginning of year................. 188 329 1,552 930 105
------- ------- ------- ------ -------
Cash and cash equivalents at end of
year.............................. $ 5,624 $ 188 $ 329 $1,552 $ 929
======= ======= ======= ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for interest............ $ 13 $ 5 $ 9 $ 7 $ --
======= ======= ======= ====== =======
NONCASH FINANCING ACTIVITIES
Issuance of common stock in
exchange for note receivable..... $ -- $ -- $ -- $ -- $ 11
======= ======= ======= ====== =======
Issuance of convertible debentures
for promissory notes............. $ 1,807 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Issuance of convertible debentures
for interest on promissory
notes............................ $ 98 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Issuance of convertible debentures
for amount due licensor.......... $ 100 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Issuance of common stock for
convertible debentures........... $ 3,380 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Issuance of common stock for
interest on convertible
debentures....................... $ 123 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
Issuance of common stock for
preferred stock.................. $ 845 $ -- $ -- $ -- $ --
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
1. Organization and Basis of Presentation
Salix Holdings, Ltd. (the "Company") was incorporated in the British
Virgin Islands in December 1993 for the purpose of acquiring all of the
outstanding capital stock of Salix Pharmaceuticals, Inc., a California
corporation ("Salix"), and Glycyx Pharmaceuticals, Ltd., a Bermuda
corporation ("Glycyx"). Salix was incorporated in California in 1989 and
Glycyx was incorporated in Bermuda in 1992. Salix and Glycyx had identical
shareholder ownership interests in the period from the inception of Glycyx
through March 1994. The Company is developing new pharmaceuticals,
primarily focused in the area of gastrointestinal disease.
In March 1994, Salix Holdings, Ltd. entered into an agreement with the
shareholders of Salix and Glycyx, whereby it issued shares in exchange for
the shareholders' interests in Salix and Glycyx. As a result of the
exchange, Salix and Glycyx became wholly owned subsidiaries of the Company.
Each share of Salix common and preferred stock was exchanged on a one-for-
one basis for a similar share of the Company's common and preferred stock,
respectively. Each share of Glycyx common stock was exchanged on a one-for-
one basis for a share of the Company's common stock plus $0.001 per share
of Glycyx common stock exchanged. These transactions have been accounted
for as a reorganization in a manner similar to a pooling of interests to
reflect the continuity of the Company's shareholders' interests in Salix
and Glycyx. Accordingly, the consolidated balance sheets include the assets
and liabilities of the combined companies and the consolidated statements
of operations, shareholders' equity (net capital deficiency) and cash flows
include their operations for all of the years presented. The Company, as
used herein, refers to Salix Holdings, Ltd. and its subsidiaries.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. These statements are stated in United
States dollars and are prepared under accounting principles generally
accepted in the United States. All significant intercompany balances and
transactions have been eliminated. In 1992 and 1993, Salix and Glycyx were
presented as combined entities, which included the elimination of all
intercompany transactions, due to common ownership.
The Company has sustained continuing operating losses and expects such
losses to continue until product approvals are obtained and product
revenues reach a sufficient level to support ongoing operations. There can
be no assurance that such product approvals and revenues will be obtained
on a timely basis, if at all. The Company believes that its current cash
reserves should be sufficient to satisfy the cash requirements of product
development programs for at least the next year. The Company's actual cash
requirements may vary materially from those now planned because of results
of research and development activities, establishment of and changes in
relationships with strategic partners, changes in focus and direction of
the Company's research and development programs, the FDA regulatory
process, and other factors. To the extent that the Company proceeds with
the development and licensing of new products, the Company anticipates that
it will need to raise additional funds in the form of debt or equity
financing to fund its future operations. The Company may also enter into
collaborative arrangements with corporate partners that could provide the
Company with additional funding in the form of equity, debt, licensing,
milestone and/or royalty payments. There can be no assurance that the
Company will be able to enter into such arrangements or raise any
additional funds on terms favorable to the Company, or at all. If adequate
capital is unavailable, the Company may have to reduce substantially or
eliminate expenditures for research and development of new products and
indications.
F-7
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
2. Summary of Significant Accounting Policies
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada.
USES OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
FAIR VALUE OF CASH AND CASH EQUIVALENTS AND PROMISSORY NOTES
For these short-term instruments, the carrying value approximates fair
value at December 31, 1995 and 1996, respectively.
REVENUE RECOGNITION
The Company's collaborative research and licensing agreements with its
license partners provide for payments in support of the Company's research
activities and additional payments upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded
when earned based on contract costs incurred to date compared with total
estimated contract costs. License fees and milestone revenues are
recognized according to contract terms, to the extent that no performance
obligations remain and collection of the receivable amount is deemed
probable. Amounts received in advance of the applicable research activities
are deferred as unearned revenue. Amounts received which are subject to
refundability until the point at which milestones are achieved are deferred
as advances from licensees, until earned.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development expense included a payment to a licensor totaling $1,064,000 in
1992.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities from
date of purchase of three months or less to be cash equivalents. The
Company maintains its cash and cash equivalents in several different
instruments with various banks and brokerage houses. This diversification
of risk is consistent with Company policy to maintain liquidity and ensure
the safety of principal.
F-8
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
2. Summary of Significant Accounting Policies, continued
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over the
estimated useful lives of the assets, generally five years, using the
straight-line method. Property and equipment consist of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Cost:
Furniture and equipment......................................... $105 $101
Computer equipment.............................................. 122 105
Laboratory equipment............................................ 106 106
---- ----
333 312
Accumulated depreciation:
Furniture and equipment......................................... 64 37
Computer equipment.............................................. 67 54
Laboratory equipment............................................ 57 42
---- ----
188 133
---- ----
Net property and equipment........................................ $145 $179
==== ====
</TABLE>
FOREIGN CURRENCY TRANSLATION
The functional currency for the Company is the United States dollar. The
adjustment resulting from translating the financial statements of the
Company and its foreign subsidiaries is reflected in operations. A foreign
currency transaction gain of $78,717 was incurred in the year ended
December 31, 1996. Foreign currency transaction losses of $7,066, $45,072,
$36,166 and $76,554 were incurred in the years ended December 31, 1995,
1994, 1993 and 1992, respectively, and are included in the results of
operations.
RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform to
the 1996 consolidated financial statement presentation.
NET LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted-average number
of common shares outstanding during each year. Common equivalent shares are
excluded from the computation as their effect is antidilutive.
3. Initial Public Offering
In May 1996, the Company completed its initial public offering, listed on
The Toronto Stock Exchange, and issued 2,000,000 shares of its common stock
at a price of Cdn. $7.00 (U.S. $5.25) per share. The Company received
approximately $8.7 million in cash, net of underwriting discounts,
commissions and other offering costs. Simultaneously with the closing of
the initial public offering, each outstanding share of convertible
preferred stock was automatically converted into one share of
F-9
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
3. Initial Public Offering, continued
common stock, and $3.5 million principal and accrued interest of
convertible debentures issued in January and February 1996 were converted
into 1,167,625 "units" consisting of one common share and one-half of one
common share purchase warrant (see Note 10).
4. Foreign Subsidiaries
Glycyx, a wholly owned subsidiary incorporated in Bermuda, recognized net
losses of $38,567, $1,617,050, $1,213,621, $1,169,777 and $750,296 in the
years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
Salix, a wholly owned subsidiary incorporated in the United States,
recognized net losses (income) of $2,053,899, $498,752, $238,016,
$(456,259) and $260,593 in the years ended December 31, 1996, 1995, 1994,
1993 and 1992, respectively.
5. Technology Licensing
In January 1991 and March 1992, the Company entered into license
agreements with a company possessing certain patents relating to
balsalazide, a therapeutic agent with potential use in the treatment of
ulcerative colitis and other diseases. Under the agreements, the Company
will pay the licensor, which is also a shareholder in the Company, a
royalty based on a percentage of gross profit on the drug in one defined
territory and a sales-based royalty in other territories. In addition,
milestone payments from the Company to the licensor will be paid to the
licensor based upon development efforts. In the January 1991 agreement, as
amended, the Company obtained the exclusive right to develop and market
balsalazide in the United States. In the March 1992 agreement, as amended,
the Company licensed the exclusive right to develop, manufacture and market
the same drug in the rest of the world excluding Japan, Taiwan and Korea.
The first product under development pursuant to these licenses is Colazide,
a form of balsalazide proposed for the treatment of ulcerative colitis. At
December 31, 1995, a total of $100,000 was due to the licensor. Such amount
was converted to convertible debentures issued in January 1996. At December
31, 1996, a total of $555,000 was due the licensor. Such amount was paid in
February 1997.
6. License Revenue and Revenue from Collaborative Agreements
In September 1992, the Company entered into research, development and
distribution agreements whereby the Company granted its partner an
exclusive right to promote, market, distribute and sell Colazide in certain
territories outside of the United States. The research under this agreement
took place through December 1993 and revenue from research funding was
recognized as earned.
In 1992, the Company received a portion of the license fees payable under
the agreement, with the remaining payments due upon the receipt of approval
to market the product by the relevant regulatory authorities in five
principal territories. Under the distribution agreement, the partner will
purchase product from the Company at an agreed upon price based on a
percentage of the partner's selling price of the product. The licensee has
the right to offset (Pounds)750,000 (approximately $1,284,000 at December
31, 1996 exchange rates) previously paid to the Company in the form of a
20% discount against the price of Colazide purchased by the licensee, if
any.
F-10
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
6. License Revenue and Revenue from Collaborative Agreements, continued
In April 1993, Salix entered into a collaborative agreement with the
above-mentioned partner covering pharmaceutical product development and
marketing of Colazide in the United States. In consideration for the rights
granted, the partner agreed to pay the Company a specified licensing fee
and to fund development up to a specified amount. The Company recognized
development revenue of $599,000, $1,687,000, $2,252,000, $962,000 and
$1,212,190 in 1996, 1995, 1994, 1993 and 1992, respectively, under these
agreements. License fee revenue of $1,000,00 and $1,712,000 was recognized
in 1993 and 1992, respectively, as consideration for the exclusive right to
promote, market, distribute and sell Colazide in the United States and
other defined countries.
In October 1992, the Company entered into a distribution agreement with a
second licensee for Colazide in southern Europe. This agreement calls for
payments to the Company in support of clinical trials and upon the
achievement of certain milestones. Under this agreement, the partner will
purchase product when approved from the Company at an agreed upon price.
Revenues recognized under this arrangement were $78,000 in 1994 (none in
1992, 1993, 1995 or 1996). Additional monies received under this agreement
were deferred as advances from licensees pending achievement of specified
technological milestones. The amount deferred was $1,186,400 at December
31, 1995. Such milestones were achieved and accepted by the licensee in
1996 and revenue of $1,186,400 was recognized.
In July 1993, the Company entered into a collaborative relationship with
a company which owns the rights to balsalazide in Japan, Taiwan and Korea.
In return for access to drug data the Company received milestone payments
of $170,000, $296,000 and $452,000, which were recognized as revenue in
1995, 1994 and 1993, respectively.
7. Commitments
The Company leases an office facility. Rent expense was approximately
$112,000, $81,000, $85,000, $98,000 and $19,000 for the years ended
December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
In June 1996, the Company amended the lease related to its office
facility to extend through July 2000. Future payments for operating leases
at December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
Years ending December 31,
1997............................................................. $140
1998............................................................. 144
1999............................................................. 159
2000............................................................. 93
----
Total minimum payments required.................................... $536
====
</TABLE>
In October 1996, the Company entered into a binding purchase order
commitment for inventory purchases aggregating $674,000 to be delivered in
1997.
F-11
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
8. Shareholders' Equity (Net Capital Deficiency)
PREFERRED STOCK
On May 15, 1996, the Company closed its initial public offering of its
common stock. At that time, all issued and outstanding shares of the
Company's Series A, B and C convertible preferred stock were converted into
466,445 shares of the Company's common stock. A total of 5,000,000 shares
of preferred stock are authorized and issuable in series. No shares of
preferred stock were issued as of December 31, 1996.
STOCK OPTION PLANS
The Company's 1994 Stock Plan (the "Plan") was adopted by the board of
directors in March 1994 and approved by the shareholders in March 1995. The
Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the board
of directors and approved by the Company's shareholders in February 1996.
The options granted under the Plan and the 1996 Plan may be either
incentive stock options or nonstatutory stock options. Options granted
expire no later than ten years from the date of grant. For incentive stock
options, the option price shall be at least 100% of the fair market value
on the date of grant, and no less than 85% of the fair market value for
nonqualified stock options. If, at the time the Company grants an option,
the optionee directly or by attribution owns stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company,
the option price shall be at least 110% of the fair market value and shall
not be exercisable more than five years after the date of grant. The
options generally become exercisable in increments of 1/48th per month over
a period of 48 months from the date of grant. Options may be granted with
different vesting terms as determined by the board of directors.
At December 31, 1996, the Company has reserved 1,076,862 shares of common
stock for issuance to eligible participants under the two plans.
F-12
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
8. Shareholders' Equity (Net Capital Deficiency), continued
Aggregate option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------
SHARES WEIGHTED-
AVAILABLE NUMBER OF AVERAGE
FOR GRANT SHARES EXERCISE PRICE
--------- --------- --------------
<S> <C> <C> <C>
Shares authorized...................... 400,000 -- --
Options granted........................ (365,825) 365,825 $1.00
-------- ------- -----
Balance at December 31, 1994............. 34,175 365,825 $1.00
Additional shares authorized........... 100,000 -- --
Options granted........................ (60,000) 60,000 $1.00
-------- ------- -----
Balance at December 31, 1995............. 74,175 425,825 $1.00
Additional shares authorized........... 650,000 -- --
Options granted........................ (133,000) 133,000 $3.82
Options exercised...................... -- (73,138) $1.00
Options canceled....................... 4,687 (4,687) $1.00
-------- ------- -----
Balance at December 31, 1996............. 595,862 481,000 $1.78
======== ======= =====
</TABLE>
At December 31, 1995, options were exercisable to purchase 240,013 shares
at a weighted-average exercise price of $1.00 per share. At December 31,
1996, options were exercisable to purchase 272,167 shares at a weighted-
average exercise price of $1.21 per share.
Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.00 to $5.25 per share. The weighted-average remaining contractual
life of those options is 7.8 years.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE OPTIONS
---------------------------------------------------------- --------------------------
WEIGHTED-
WEIGHTED- AVERAGE WEIGHTED-
EXERCISE AVERAGE REMAINING AVERAGE
PRICE EXERCISE CONTRACTUAL EXERCISE
RANGE NUMBER PRICE LIFE NUMBER PRICE
---------------------------------------------------------- --------------------------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$1.00 348,000 $1.00 7.0 256,000 $1.00
$3.67 120,000 $3.67 10.0 7,500 $3.67
$5.25 13,000 $5.25 9.1 8,667 $5.25
---------------------------------------------------------------------
481,000 $1.78 7.8 272,167 $1.21
=====================================================================
</TABLE>
The weighted-average fair value of options granted in fiscal 1996 and
1995 was $2.01 and $0.29, respectively.
STOCK-BASED COMPENSATION
As permitted under FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("FASB 123"), the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") in accounting for stock-based awards to employees. Under APB 25,
the Company generally recognizes no compensation expense with respect to
such awards.
Pro forma information regarding net loss and net loss per share is
required by FASB 123 for awards granted after December 31, 1994 as if the
Company had accounted for its stock-based awards
F-13
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
8. Shareholders' Equity (Net Capital Deficiency), continued
to employees under the fair value method of FASB 123. The fair value of the
Company's stock-based awards to employees was estimated using a Black-
Scholes option pricing model (minimum value model for awards prior to the
Company's initial public offering). The Black-Scholes option valuation
model was developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable. In addition,
the Black-Scholes model requires the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's stock-
based awards to employees have characteristics significantly different from
those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock-based awards to employees. The fair
value of the Company's stock-based awards to employees was estimated
assuming no expected dividends and the following weighted-average
assumptions:
<TABLE>
<CAPTION>
OPTIONS
----------
1996 1995
---- ----
<S> <C> <C>
Expected life (years)..................... 5 5
Expected volatility....................... 0.6 --
Risk-free interest rate................... 6.13% 7.00%
</TABLE>
The effect of applying the FASB 123 Black-Scholes option valuation model
(minimum value model for awards prior to the Company's initial public
offering) to the Company's stock option grants did not result in pro forma
net loss and loss per share amounts that are materially different from
historical amounts reported. Therefore, such pro forma information is not
separately presented herein. Because FASB 123 is applicable only to awards
granted subsequent to December 31, 1994, its pro forma effect will not be
fully reflected until approximately 1998. Future pro forma net income
(loss) and earnings (loss) per share results may be materially different
from actual amounts reported.
401(k) Plan
In 1996, the Company adopted the Salix Pharmaceuticals, Inc. 401(k)
Retirement Plan. Eligible participants may elect to defer a percentage of
their compensation. The Company matches up to 25% of such participant
deferrals, provided that such deferrals do not exceed 6% of the
participant's compensation. The Company's total matching contribution for
all participants in fiscal 1996 was $4,333. Additional discretionary
employer contributions may be made on an annual basis.
9. Income Taxes
As of December 31, 1996, the Company has a U.S. federal net operating
loss carryforward of approximately $5,600,000 related to its U.S.
subsidiary, Salix Pharmaceuticals, Inc. This will expire on various dates
beginning in 2004 through 2011, if not utilized.
F-14
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
9. Income Taxes, continued
Significant components of the Company's deferred tax assets and
liabilities for federal and state income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 2,000 $ 900
Research credit carryforwards (expiring 2004 to 2010)... 100 150
Capitalized research and development expenses........... 100 100
Deferred revenue........................................ -- 200
Other................................................... 100 100
------- -------
Total deferred tax assets............................. 2,300 1,450
Valuation allowance....................................... (2,300) (1,450)
------- -------
Net deferred taxes $ -- $ --
======= =======
</TABLE>
Because of the Company's lack of earnings history, the deferred tax asset
has been fully offset by a valuation allowance. The valuation allowance
increased by $113,000 during the year ended December 31, 1995.
Utilization of the federal net operating loss and credit carryforwards
may be subject to a substantial annual limitation due to the "change in
ownership" provisions of the Internal Revenue Code of 1986. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.
The Company's Bermuda subsidiary, Glycyx, has a cumulative loss of
approximately $2,200,000. Because Glycyx is domiciled in Bermuda where the
effective tax rate is zero, the Company expects to receive no future tax
benefit from these net operating losses.
10.Promissory Notes and Warrants
In January and March 1995, the Company issued $607,000 of convertible
promissory notes to certain investors. In connection with the issuance of
the above convertible promissory notes, the Company issued to the note
holders warrants to purchase up to 202,332 shares of common stock at a
purchase price of $0.001 per share of common stock exercisable thereunder.
These warrants are immediately exercisable at $3.00 per share and expire in
2000.
In July and October 1995, the Company issued additional promissory notes
in the amount of $1,200,000 together with warrants to purchase 399,999
shares of common stock. Each of the warrants allow for the purchase of one
share of common stock at an exercise price of $3.00 per share, subject to
adjustment in certain circumstances, and expire in 2003.
On January 12, 1996 and February 2, 1996, the Company completed the
private placement of an aggregate principal amount of $3,379,500 of 10%
convertible secured debentures maturing on December 31, 1998 to certain new
and existing investors. As part of the financing, holders of all of the
outstanding $607,000 of convertible promissory notes and $1,200,000
promissory notes
F-15
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
(EXPRESSED IN U.S. DOLLARS)
10. Promissory Notes and Warrants, continued
previously issued by the Company converted the principal and accrued
interest on such notes into debentures. In addition, $100,000 owed by the
Company to a licensor as of December 31, 1995 was converted into debentures
as part of this financing.
Upon the completion of the initial public offering, the debentures were
converted at the option of the holder into units comprised of one share of
common stock and one-half of one common stock purchase warrant, as referred
to in Note 3. The conversion price for such units was Cdn. $4.00 (U.S.
$3.00 at the May 15, 1996 exchange rate). The 583,851 common stock purchase
warrants were immediately exercisable at Cdn. $7.00 (U.S. $5.25) per share
and expired unexercised in January 1997. Also, in connection with the
initial public offering, the Company issued to the underwriters common
share purchase warrants, exercisable into 200,000 common shares at a price
of Cdn $7.00 (U.S. $5.25). Such purchase warrants are exercisable through
May 1997.
At December 31, 1996, 1,386,182 shares of common stock are reserved for
issuance upon the exercise of the aforementioned warrants.
SECURED PROMISSORY NOTE
In June 1995, the Company provided a vendor with a secured promissory
note and related security agreement, wherein the Company agreed to pay
(Pounds)234,036 ($363,458 at December 31, 1995 exchange rates) at specified
times in payment of trade debts incurred for services provided. The
collateral that was subject to the security interest created consisted of
future milestone payments due the Company from one of its distribution
partners. This secured promissory note was paid-in-full in September 1996.
11. Revenues From Significant Customers
Revenues from three customers represented the following percentages of
total revenues during fiscal 1996, 1995, 1994, 1993 and 1992:
<TABLE>
<CAPTION>
CUSTOMER 1996 1995 1994 1993 1992
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
A 32.8% 85.5% 79.7% 75.2% 41.5%
B -- % 10.1% 10.4% 10.1% -- %
C 65.2% 1.1% -- % 14.7% 58.5%
</TABLE>
All revenue is associated with the development of a single product,
Colazide.
F-16
<PAGE>
SALIX HOLDINGS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,657 $ 5,624
Other current assets.................................. 398 79
-------- -------
Total current assets................................ 4,055 5,703
Property and equipment, net............................. 152 145
Other assets............................................ 43 10
-------- -------
$ 4,250 $ 5,858
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 954 $ 667
Other current liabilities............................. 65 43
Amount due licensor................................... 50 555
-------- -------
Total current liabilities........................... 1,069 1,265
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none issued and
outstanding.......................................... -- --
Common stock, no par value; 20,000,000 shares autho-
rized; 7,118,173 shares and 6,858,173 shares issued
and outstanding at June 30, 1997 and December 31,
1996, respectively................................... 14,257 13,194
Accumulated deficit................................... (11,076) (8,601)
-------- -------
Shareholders' equity................................ 3,181 4,593
-------- -------
$ 4,250 $ 5,858
======== =======
</TABLE>
ON BEHALF OF THE BOARD:
(Signed) LAWRANCE A. BROWN, JR. (Signed) NICHOLAS M. EDIGER
Director Director
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
SALIX HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDING
JUNE 30,
------------------
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenue:
Revenue from collaborative agreements and other.......... $ 21 $ 384
Expenses:
License fees............................................. 50 50
Research and development................................. 1,315 1,037
General and administrative............................... 1,231 740
-------- --------
Total expenses......................................... 2,596 1,827
-------- --------
Loss from operations....................................... (2,575) (1,443)
Interest income............................................ 122 45
Interest expense and other................................. (22) (173)
-------- --------
Net loss............................................... $ (2,475) $ (1,571)
======== ========
Net loss per share......................................... $ (0.35) $ (0.41)
======== ========
Shares used in computing net loss per share................ 6,975 3,877
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
SALIX HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNTS DEFICIT EQUITY
--------- ------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996...... 6,858,173 $13,194 $ (8,601) $4,593
Issuance of common stock upon
exercise of warrants
(unaudited)...................... 200,000 1,003 -- 1,003
Issuance of common stock upon
exercise of stock options
(unaudited)...................... 60,000 60 -- 60
Net loss (unaudited).............. -- -- (2,475) (2,475)
========= ======= ======== ======
Balance at June 30, 1997
(unaudited)...................... 7,118,173 $14,257 $(11,076) $3,181
========= ======= ======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
SALIX HOLDINGS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDING
JUNE 30,
------------------
1997 1996
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................. $ (2,475) $ (1,571)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 32 27
Changes in assets and liabilities:
Other current assets and other assets.................. (352) (29)
Accounts payable and other current liabilities......... 309 (125)
Unearned revenue....................................... -- (374)
Amount due licensor.................................... (505) --
-------- --------
Net cash used in operating activities................ (2,991) (2,072)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment...................... (39) (6)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of stock (net of offering costs).. 1,063 8,697
Proceeds from issuance of convertible secured
debentures.............................................. -- 1,375
-------- --------
Net cash provided by financing activities............ 1,063 10,072
-------- --------
Net increase (decrease) in cash and cash equivalents....... (1,967) 7,994
Cash and cash equivalents at beginning of period........... 5,624 188
-------- --------
Cash and cash equivalents at end of period................. $ 3,657 $ 8,182
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................... $ -- $ 13
======== ========
NONCASH FINANCING ACTIVITIES
Issuance of convertible debentures for promissory notes.. $ -- $ 1,807
======== ========
Issuance of convertible debentures for interest on
promissory notes........................................ $ -- $ 98
======== ========
Issuance of convertible debentures for amount due
licensor................................................ $ -- $ 100
======== ========
Issuance of common stock for convertible debentures...... $ -- $ 3,380
======== ========
Issuance of common stock for interest on convertible
debentures.............................................. $ -- $ 123
======== ========
Issuance of common stock for preferred stock............. $ -- $ 845
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
1. Organization and Basis of Presentation
Salix Holdings, Ltd. (the "Company") was incorporated in the British
Virgin Islands in December 1993 for the purpose of acquiring all of the
outstanding capital stock of Salix Pharmaceuticals, Inc., a California
corporation ("Salix"), and Glycyx Pharmaceuticals, Ltd., a Bermuda
corporation ("Glycyx"). Salix was incorporated in California in 1989 and
Glycyx was incorporated in Bermuda in 1992. The Company is developing new
pharmaceuticals, primarily focused in the area of gastrointestinal disease.
The condensed consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
balances and transactions have been eliminated. These statements are stated
in United States dollars.
The accompanying unaudited condensed consolidated financial statements
include all adjustments (consisting only of normal recurring items) which,
in the opinion of management, are necessary for a fair presentation of
financial position, results of operations and cash flows. These financial
statements should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations and the
audited financial statements for the fiscal year ended December 31, 1996
included elsewhere in this Prospectus. The results of operations for
interim periods are not necessarily indicative of results to be expected
for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada.
2. Net Loss Per Common Share
Net loss per common share is computed using the weighted-average number
of common shares outstanding during each year. Common equivalent shares are
excluded from the computation as their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" ("SFAS 128"). The Statement is
effective for both interim and annual financial statements for periods
ending after December 15, 1997. Under the Statement, primary earnings per
share ("EPS") computed in accordance with Accounting Principle Board
Opinion No. 25 will be replaced with a new simpler calculation called
"basic EPS" and the Company will be required to restate EPS amounts for all
prior periods. Under the new requirements, basic loss per share for the six
months ended June 30, 1997 and 1996 would be unchanged from the reported
loss per share amounts.
3. License Revenue and Revenue from Collaborative Agreements
In April 1993, Salix entered into a collaborative agreement with a
partner covering pharmaceutical product development and marketing of
Colazide in the United States. In consideration for the rights granted, the
partner agreed to pay the Company a specified licensing fee and to fund
development up to a specified amount. The Company recognized development
revenue of $374,000 in the six-month period ending June 30, 1996, under
this agreement.
F-21
<PAGE>
SALIX HOLDINGS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JUNE 30, 1997
(UNAUDITED)
4. Commitments
In October 1996, the Company entered into a binding purchase order
commitment for inventory purchases aggregating $674,000 to be delivered in
1997. At June 30, 1997, inventory of approximately $249,000 had been
received against this commitment.
5. Shareholders' Equity
In May 1996, the Company closed its initial public offering of its common
stock. In connection with that offering, the Company issued to the
underwriters common share purchase warrants, exercisable into 200,000
common shares at a price of Cdn $7.00. All such purchase warrants were
exercised in 1997 raising proceeds to the Company of approximately Cdn
$1,400,000 (U.S. $1,003,000).
In addition, an option for 60,000 shares of common stock was exercised in
February 1997.
6. Revenues from Significant Customers
One customer represented 97% of total revenues during the six-month
period ended June 30, 1996.
7. Subsequent Event
On August 11, 1997, the Company's Board of Directors authorized
management to commence a public offering of securities in Canada together
with a concurrent offering in the United States.
F-22
<PAGE>
[LOGO OF SALIX HOLDINGS, LTD.]
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THIS IS A PRELIMINARY PROSPECTUS RELATING TO THESE SECURITIES, A COPY OF +
+WHICH HAS BEEN FILED WITH THE APPROPRIATE SECURITIES COMMISSION OR SIMILAR +
+REGULATORY AUTHORITY IN EACH OF THE PROVINCES OF CANADA BUT WHICH HAS NOT YET +
+BECOME FINAL FOR THE PURPOSE OF A DISTRIBUTION TO THE PUBLIC. INFORMATION +
+CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. THESE SECURITIES MAY +
+NOT BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED IN ANY SUCH PROVINCE, PRIOR TO +
+THE TIME A RECEIPT IS OBTAINED FOR THE FINAL PROSPECTUS FROM THE APPROPRIATE +
+SECURITIES COMMISSION OR SIMILAR REGULATORY AUTHORITY OF SUCH PROVINCE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PRELIMINARY PROSPECTUS DATED AUGUST 15, 1997
THIS PROSPECTUS HAS BEEN FILED UNDER PROCEDURES IN THE PROVINCES OF BRITISH
COLUMBIA, ALBERTA, SASKATCHEWAN, MANITOBA, ONTARIO, QUEBEC, NOVA SCOTIA, NEW
BRUNSWICK, NEWFOUNDLAND AND PRINCE EDWARD ISLAND WHICH PERMIT CERTAIN
INFORMATION WITH RESPECT TO THESE SECURITIES TO BE DETERMINED AFTER THE
PROSPECTUS HAS BECOME FINAL AND PERMIT THE OMISSION FROM THIS PROSPECTUS OF
SUCH INFORMATION. SUCH PROCEDURES REQUIRE THE DELIVERY TO PURCHASERS OF A
PROSPECTUS OR A PROSPECTUS SUPPLEMENT CONTAINING THIS OMITTED INFORMATION
WITHIN A SPECIFIED PERIOD OF TIME AFTER AGREEING TO PURCHASE ANY OF THESE
SECURITIES.
This prospectus constitutes a public offering of these securities only in those
jurisdictions where they may be lawfully offered for sale and therein only by
persons permitted to sell such securities. No securities commission or similar
authority in Canada has in any way passed upon the merits of the securities
offered hereunder and any representation to the contrary is an offence.
--------
New Issue
- ---------
[LOGO OF SALIX HOLDINGS, INC.]
Cdn. $
Common Shares
--------
This prospectus offering consists of an offering of common shares (the
"Common Shares") issued by Salix Holdings, Ltd. (the "Company") at a price of
Cdn. $ per Common Share. The price at which the Common Shares are offered
hereby was established by negotiation between the Company and Levesque Beaubien
Geoffrion Inc., Yorkton Securities Inc., Marleau, Lemire Securities Inc. and
Midland Walwyn Capital Inc. (collectively, the "Underwriters"). See "Plan of
Distribution".
AN INVESTMENT IN THE COMMON SHARES MAY BE REGARDED AS SPECULATIVE AND SUBJECT
TO A HIGH DEGREE OF RISK. AFTER GIVING EFFECT TO THIS OFFERING, THE OFFERING
PRICE FOR EACH COMMON SHARE EXCEEDS THE CONSOLIDATED NET TANGIBLE BOOK VALUE
PER COMMON SHARE AS AT JUNE 30, 1997 BY $ , REPRESENTING A DILUTION OF %.
SEE "DILUTION".
-------------------------
PRICE: CDN. $ PER COMMON SHARE
-------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITERS' NET PROCEEDS
THE PUBLIC FEE TO THE COMPANY(/1/)
---------- ------------- -------------------
<S> <C> <C> <C>
Per Common Share................... Cdn. $ Cdn. $ Cdn. $
Total(/2/)......................... Cdn. $ Cdn. $ Cdn. $
</TABLE>
NOTES:
- ---
(1) The Company has granted to the Underwriters a 60-day option to purchase up
to an additional Common Shares, solely to cover over-allotments, if
any. See "Plan of Distribution". If such option is exercised in full, the
total Price to the Public, Underwriters' Fee and Net Proceeds to the
Company will be Cdn. $ , Cdn. $ and Cdn. $ , respectively.
(2) Before deducting expenses payable by the Company, estimated at Cdn. $ .
The Underwriters, as principals, conditionally offer the Common Shares, subject
to prior sale, if, as and when issued and sold by the Company and accepted by
the Underwriters in accordance with the terms and conditions contained in the
Underwriting Agreement referred to under "Plan of Distribution" and subject to
the approval of certain Canadian legal matters on behalf of the Company by Aird
& Berlis and on behalf of the Underwriters by McCarthy Tetrault and of certain
United States legal matters on behalf of the Company by Wilson Sonsini Goodrich
& Rosati, P.C. and on behalf of the Underwriters by Skadden, Arps, Slate,
Meagher & Flom LLP.
Subscriptions for the Common Shares will be received subject to rejection or
allotment in whole or in part and the right is reserved to close the
subscription books at any time without notice. It is expected that the
definitive certificates evidencing the Common Shares will be available for
delivery on the closing of the offering, which is anticipated to occur on or
about , 1997, or on such later date as the Company and the Underwriters may
agree, but in any event no later than , 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Exchange Rates........................................................... 4
Eligibility for Investment............................................... 4
Summary.................................................................. 5
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 20
Price Range of Common Shares............................................. 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Consolidated Financial Data..................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 29
Management............................................................... 48
Principal Shareholders................................................... 58
Description of Share Capital............................................. 59
Prior Sales of Securities................................................ 60
Comparison of Canadian, United States and British Virgin Islands
Corporate Law........................................................... 61
Certain Tax Considerations............................................... 63
Shares Eligible for Future Sale.......................................... 67
Plan of Distribution..................................................... 69
Legal Matters............................................................ 71
Experts.................................................................. 71
Transfer Agent........................................................... 71
Material Contracts....................................................... 72
Canadian Purchasers' Statutory Rights.................................... 73
Additional Information................................................... 73
Glossary................................................................. 74
Index to Consolidated Financial Statements............................... F-1
Certificate of the Company............................................... C-1
Certificate of the Underwriters.......................................... C-2
</TABLE>
------------
The Company exists under the laws of the British Virgin Islands and its
principal office is located in Palo Alto, California. Most of the directors
and officers of the Company reside outside of Canada and substantially all of
their assets and those of the Company are located there. The Company and the
directors submit to the non-exclusive jurisdiction of the courts of each of
the Provinces of Canada and have appointed or will appoint Aird & Berlis as
agent for service of process in Canada. Service of process may be effected at
the offices of Aird & Berlis in Toronto, Ontario at Suite 1800, BCE Place, 181
Bay Street, Toronto, Ontario, Attention: Jay A. Lefton. However, it may not be
possible for purchasers of securities hereunder to effect service of process
within Canada upon directors and officers who reside outside of Canada. It may
also not be possible to enforce judgments obtained in Canadian courts
predicated on the civil liability provisions of the securities laws of certain
provinces of Canada against the Company or its directors and officers who
reside outside of Canada. The Company intends to comply with all relevant
requirements of Canadian securities legislation.
------------
3
<PAGE>
CERTIFICATE OF THE COMPANY
DATED: AUGUST 15, 1997
The foregoing, together with the documents incorporated herein by reference
and the information deemed to be incorporated herein by reference, as of the
date of the supplemented prospectus providing the information permitted to be
omitted from this prospectus, will constitute full, true and plain disclosure
of all material facts relating to the securities offered by this prospectus as
required by Part 7 of the Securities Act (British Columbia), by Part 8 of the
Securities Act (Alberta), by Part XI of the Securities Act, 1988
(Saskatchewan), by Part VII of The Securities Act (Manitoba), by Part XV of
the Securities Act (Ontario), by the Securities Act (Nova Scotia), by section
13 of the Securities Act (New Brunswick), by Part II of the Securities Act
(Prince Edward Island) and by Part XIV of The Securities Act, 1990
(Newfoundland) and the respective regulations thereunder. This prospectus, as
required by the Securities Act (Quebec) and the regulations thereunder, will
not contain any misrepresentation likely to affect the value of the market
price of the securities to be distributed.
"Randy W. Hamilton" "David Boyle"
(Signed) RANDY W.HAMILTON (Signed) DAVID BOYLE
Chairman, President and Chief Vice President, Finance and
Executive Officer Administration and Chief Financial Officer
ON BEHALF OF THE BOARD OF DIRECTORS
"Lawrance A. Brown, Jr." "Nicholas M. Ediger"
(Signed) LAWRANCE A. BROWN, JR. (Signed) NICHOLAS M. EDIGER
Director Director
C-1
<PAGE>
CERTIFICATE OF THE UNDERWRITERS
DATED: AUGUST 15, 1997
To the best of our knowledge, information and belief, the foregoing, together
with the documents incorporated herein by reference and the information deemed
to be incorporated herein by reference, as of the date of the supplemented
prospectus providing the information permitted to be omitted from this
prospectus, will constitute full, true and plain disclosure of all material
facts relating to the securities offered by this prospectus as required by
Part 7 of the Securities Act (British Columbia), by Part 8 of the Securities
Act (Alberta), by Part XI of The Securities Act, 1988 (Saskatchewan), by Part
VII of The Securities Act (Manitoba), by Part XV of the Securities Act
(Ontario), by the Securities Act (Nova Scotia), by section 13 of the
Securities Act (New Brunswick), by Part II of the Securities Act (Prince
Edward Island) and by Part XIV of The Securities Act, 1990 (Newfoundland) and
the respective regulations thereunder. To the best of our knowledge, this
prospectus, as required by the Securities Act (Quebec) and the regulations
thereunder, will not contain any misrepresentation likely to affect the value
or the market price of the securities to be distributed.
LEVESQUE BEAUBIEN GEOFFRION INC. YORKTON SECURITIES INC.
"Jacques Lemay" "Cathy R. Steiner"
Per: (Signed) JACQUES LEMAY Per: (Signed) CATHY R. STEINER
MARLEAU, LEMIRE SECURITIES INC. MIDLAND WALWYN CAPITAL INC.
"William A. Tebbutt" "John D. Grant"
Per: (Signed) WILLIAM A. TEBBUTT Per: (Signed) JOHN D. GRANT
The following includes the name of each person having an interest, either
directly or indirectly, to the extent of not less than 5% in the capital of:
LEVESQUE BEAUBIEN GEOFFRION INC.: a wholly-owned subsidiary of Levesque,
Beaubien and Company Inc., a majority-owned subsidiary of a Canadian chartered
bank.
YORKTON SECURITIES INC.: a wholly-owned subsidiary of Yorkton Holdings
Limited.
MARLEAU, LEMIRE SECURITIES INC.: a wholly-owned subsidiary of Marleau, Lemire
Inc.
MIDLAND WALWYN CAPITAL INC.: a wholly-owned subsidiary of Midland Walwyn Inc.
C-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale
of the Common Shares being registered. All of the amounts shown are estimates
except for the SEC registration fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC Registration Fee.............................................. $ 6,409
Fees payable in connection with Canadian filings.................. 18,100
NASD Filing Fee................................................... 2,615
The Toronto Stock Exchange Listing Fee............................ 11,575
Blue Sky Qualification Fees and Expenses.......................... 10,000
Printing and Engraving Expenses................................... 200,000
Legal Fees and Expenses........................................... 425,000
Accounting Fees and Expenses...................................... 110,000
Directors' and Officers' Insurance................................ 25,000
Miscellaneous..................................................... 66,301
--------
TOTAL.......................................................... $875,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Articles of Association provide that the Registrant may
indemnify against all expenses, including legal fees, and against all
judgments, fines and amounts paid in settlement and reasonably incurred in
connection with legal, administrative or investigate proceedings of any person
who is or was a party or is threatened to be made a party to any threatened,
pending or completed proceedings, whether civil, criminal, or administrative
or investigative, by reason of the fact that the person is or was a director,
an officer or a liquidator of the Registrant; or is or was, at the request of
the Registrant, serving as a director, officer or liquidator of, or in any
other capacity is or was acting for, another company or a partnership, joint
venture, trust or other enterprise. The Registrant may only indemnify a person
if the person acted honestly and in good faith and with a view to the best
interests of the Registrant and, in the case of criminal proceedings, the
person had no reasonable cause to believe that his or her conduct was
unlawful.
In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the several Underwriters, against certain
liabilities, including liabilities arising under the Securities Act.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened
litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since July 1994, the Registrant has issued and sold the following
unregistered securities:
1. On May 26, 1996, the Registrant sold 2,000,000 Common Shares (the
"IPO") for an aggregate offering price of Cdn. $14,000,000 in a public
offering in Canada. The offering was managed by Haywood Securities, Inc.,
Dlouhy Investments Inc. and Moss, Lawson & Co. Limited.
II-1
<PAGE>
2. In March and May 1997 the Registrant issued an aggregate of 200,000
Common Shares to the principal underwriters of its Canadian public offering
upon exercise of warrants to purchase such Common Shares at an exercise
price of Cdn. $7.00 issued to the Underwriters at the time of and in
connection with the IPO.
3. In January 1996, the Registrant sold in two transactions to a group of
private investors 10% Convertible Debentures in the aggregate principal
amount of $4,506,000. In connection with the IPO, all such Debentures
converted into an aggregate of 1,167,625 Common Shares.
4. In July and October 1995, the Registrant sold notes and warrants with
an exercise price of $3.00 to private investors and venture capitalists for
an aggregate purchase price of approximately $1.2 million.
5. In January and March 1995, the Registrant sold notes and warrants with
an exercise price of $3.00 to private investors and venture capitalists for
an aggregate purchase price of approximately $607,202.
6. Between April 1994 and June 1997, the Registrant issued and sold
140,138 Common Shares to employees, directors and consultants at a price of
U.S. $1.00 per share upon exercise of stock options pursuant to the
Registrant's stock plans.
The sales of the above securities were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the Securities Act, or
Regulation D promulgated thereunder, or Rule 701 promulgated under Section
3(b) of the Securities Act, as transactions by an issuer not involving a
public offering or transactions pursuant to compensatory benefit plans and
contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intention
to acquire the securities for investment only and not with a view to or for
sale in connection with any distribution thereof. All recipients either
received adequate information about the Registrant or had access through
employment or other relationships, to such information. In addition in
connection with the transactions described in items 1, 2, 3, 4 and 5 above,
certain of the sales and issuances were deemed to be exempt from registration
under the Securities Act in reliance on Regulation S promulgated thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Memorandum of Association of Salix Holdings, Ltd.
3.2 Articles of Association of Salix Holdings, Ltd.
4.1* Form of Common Share Certificate.
4.2 Form of Warrant to purchase Common Shares.
4.3 Form of Warrant to purchase Common Shares.
5.1** Opinion of counsel regarding legality of the Common Shares.
10.1 Form of Indemnification Agreement between the Registrant and each of its officers
and directors.
10.2 Form of 1994 Stock Plan for Salix Holdings, Ltd. and form of Stock Option and
Restricted Stock Purchase Agreements thereunder.
10.3 Form of 1996 Stock Plan for Salix Holdings, Ltd. and form of Notice of Stock Option
Grant and Stock Option Agreement thereunder.
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.4+ Amendment Agreement effective as of September 17, 1992 by and among
Glycyx Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex
Laboratories, Ltd.
10.5+ License Agreement, dated September 17, 1992 between Biorex Laboratories
Limited and Glycyx Pharmaceuticals Limited and letter agreement
amendments thereto.
10.6+ Research and Development Agreement dated September 21, 1992 between
Glycyx Pharmaceuticals, Ltd. and AB Astra and letter agreement
amendments thereto.
10.7+ Distribution Agreement dated September 21, 1992 between Glycyx
Pharmaceuticals, Ltd. and AB Astra.
10.8+ Amended and Restated License Agreement by and between Salix
Pharmaceuticals, Inc. and Biorex Laboratories, Limited, dated April 16,
1993.
10.9+ Co-Participation Agreement, dated April 30, 1993 between Salix
Pharmaceutical, Inc. and AB Astra as amended by Amendment No. 1 thereto
effective September 30, 1993.
10.10+ Manufacturing Agreement, dated September 15, 1993 between Courtaulds
Chemicals Limited and Glycyx Pharmaceuticals, Limited.
10.11+ Distribution Agreement, dated September 23, 1994 between Glycyx
Pharmaceuticals, Ltd. and Menarini International Operations Luxembourg
SA and amendments thereto.
10.12+ License Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A.
and Salix Pharmaceuticals, Inc.
10.13+ Supply Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and
Salix Pharmaceuticals, Inc.
10.14 Lease dated January 1, 1992 by and between Kontrabecki-Mason Developers
and Salix Pharmaceuticals, Inc., as amended.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
** To be supplied by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission. Omitted portions have been filed
separately with the Commission.
Unless otherwise indicated, exhibits have previously been filed.
(b) Financial Statement Schedules:
All Schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each Purchaser.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California General Corporation Law, the Articles of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
on Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Palo Alto, State of California, on the 25th day of
September, 1997.
Salix Holding Ltd
/s/ Randy W. Hamilton
By: _________________________________
(RANDY W. HAMILTON)
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Randy W. Hamilton Chairman of the Board of September 25, 1997
- --------------------------------- Directors, President and
(RANDY W. HAMILTON) Chief Executive Officer
(Principal Executive Officer)
David Boyle* Vice President, Finance & September 25, 1997
- --------------------------------- Administration, and Chief
(DAVID BOYLE) Financial Officer (Principal
Financial and Accounting
Officer)
Lorin K. Johnson* Vice President, Research, September 25, 1997
- --------------------------------- and Director
(LORIN K. JOHNSON)
David E. Lauck* Director September 25, 1997
- ---------------------------------
(DAVID E. LAUCK)
Lily Baxendale* Director September 25, 1997
- ---------------------------------
(LILY BAXENDALE)
Nicholas M. Ediger* Director September 25, 1997
- ---------------------------------
(NICHOLAS M. EDIGER)
Lawrance A. Brown, Jr.* Director September 25, 1997
- ---------------------------------
(LAWRANCE A. BROWN, JR.)
John F. Chappell* Director September 25, 1997
- ---------------------------------
(JOHN F. CHAPPELL)
*By: /s/ Randy Hamilton
------------------------------
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Memorandum of Association of Salix Holdings, Ltd.
3.2 Articles of Association of Salix Holdings, Ltd.
4.1* Form of Common Share Certificate.
4.2 Form of Warrant to purchase Common Shares.
4.3 Form of Warrant to purchase Common Shares.
5.1** Opinion of counsel regarding legality of the Common Shares.
10.1 Form of Indemnification Agreement between the Registrant and each of its officers
and directors.
10.2 Form of 1994 Stock Plan for Salix Holdings, Ltd. and form of Stock Option and
Restricted Stock Purchase Agreements thereunder.
10.3 Form of 1996 Stock Plan for Salix Holdings, Ltd. and form of Notice of Stock Option
Grant and Stock Option Agreement thereunder.
10.4+ Amendment Agreement effective as of September 17, 1992 by and among Glycyx
Pharmaceuticals, Ltd., Salix Pharmaceuticals, Inc. and Biorex Laboratories, Ltd.
10.5+ License Agreement, dated September 17, 1992 between Biorex Laboratories Limited and
Glycyx Pharmaceuticals Limited and letter agreement amendments thereto.
10.6+ Research and Development Agreement dated September 21, 1992 between Glycyx
Pharmaceuticals, Ltd. and AB Astra and letter agreement amendments thereto.
10.7+ Distribution Agreement dated September 21, 1992 between Glycyx Pharmaceuticals, Ltd.
and AB Astra.
10.8+ Amended and Restated License Agreement by and between Salix Pharmaceuticals, Inc.
and Biorex Laboratories, Limited, dated April 16, 1993.
10.9+ Co-Participation Agreement, dated April 30, 1993 between Salix Pharmaceutical, Inc.
and AB Astra as amended by Amendment No. 1 thereto effective September 30, 1993.
10.10+ Manufacturing Agreement, dated September 15, 1993 between Courtaulds Chemicals
Limited and Glycyx Pharmaceuticals, Limited.
10.11+ Distribution Agreement, dated September 23, 1994 between Glycyx Pharmaceuticals,
Ltd. and Menarini International Operations Luxembourg SA and amendments thereto.
10.12+ License Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix
Pharmaceuticals, Inc.
10.13+ Supply Agreement, dated June 24, 1996 between Alfa Wassermann S.p.A. and Salix
Pharmaceuticals, Inc.
10.14 Lease dated January 1, 1992 by and between Kontrabecki-Mason Developers and Salix
Pharmaceuticals, Inc., as amended.
21.1 Subsidiaries of the Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
23.2** Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* Filed herewith.
** To be supplied by amendment.
+ Confidential treatment has been requested with respect to certain portions
of this exhibit pursuant to a request for confidential treatment filed with
the Securities and Exchange Commission. Omitted portions have been filed
separately with the Commission.
Unless otherwise indicated, exhibits have been previously filed.
<PAGE>
EXHIBIT 1.1
DRAFT: SEPTEMBER 10, 1997
-------------------------
UNDERWRITING AGREEMENT
, 1997
Salix Holdings, Ltd.
3600 W. Bayshore Rd., Suite 205
Palo Alto, California 94303
Attention: Randy Hamilton
President and Chief Executive Officer
- ----------------------------------------------------
The undersigned, Levesque Beaubien Geoffrion Inc. ("Levesque"), Yorkton
Securities Inc. ("Yorkton"), Marleau, Lemire Securities Inc. ("Marleau") and
Midland Walwyn Capital Inc. ("Midland") (collectively, the "Underwriters" and
each individually an "Underwriter") understand that Salix Holdings, Ltd. (the
"Corporation") proposes to issue and sell to the Underwriters 3,000,000 common
shares of the Corporation (the "Firm Shares") pursuant to this Agreement. In
addition, for the sole purpose of covering over-allotments in connection with
the sale of the Firm Shares, at the option of the Underwriters, the Corporation
shall issue and sell to the Underwriters up to an additional 450,000 common
shares of the Corporation (the "Additional Shares"). The Firm Shares and any
Additional Shares purchased by the Underwriters are referred to herein as the
"Purchased Shares".
The Corporation and the Underwriters confirm their Agreement as follows:
DEFINITIONS
In this Agreement:
"1933 ACT" means the United States Securities Act of 1933, as amended;
"1934 ACT" means the United States Securities Exchange Act of 1934, as amended,
including the rules and regulations adopted by the SEC thereunder;
"ADDITIONAL CLOSING DATE" has the meaning given to it in subparagraph 2(b);
"ADDITIONAL SHARES" has the meaning given to it above;
<PAGE>
"AGREEMENT" means the agreement resulting from the acceptance by the Corporation
of the offer made by the Underwriters by this letter;
"BUSINESS DAY" means a day which is not a Saturday, a Sunday or a statutory or
civic holiday in Montreal, Toronto or Palo Alto;
"CANADIAN PRELIMINARY PROSPECTUS" has the meaning given to it in paragraph 1;
"CANADIAN FINAL PROSPECTUS" has the meaning given to it in paragraph 1;
"CANADIAN SECURITIES LAWS" means all applicable securities laws in each of the
Qualifying Provinces and the respective regulations under such laws together
with applicable published policy statements of the Canadian Securities
Regulatory Authorities;
"CANADIAN SECURITIES REGULATORY AUTHORITIES" means the securities regulatory
authorities in each of the Qualifying Provinces;
"CANADIAN SUPPLEMENTED PROSPECTUS" has the meaning given to it in paragraph 1;
"CLAIM" has the meaning given to it in subparagraph 10(b);
"CLOSING" means the completion of the issue and sale by the Corporation of the
Firm Shares or Additional Shares, as applicable, and the purchase by the
Underwriters of the Firm Shares or Additional Shares, as applicable, pursuant to
this Agreement;
"CLOSING DATE" means ____, 1997 or such other date as the Corporation and the
Underwriters may agree upon in writing;
"CLOSING TIME" means __.m. (______time) on the Closing Date or Additional
Closing Date or such other time on the Closing Date or Additional Closing Date
as the Corporation and the Underwriters may agree;
"COMMON SHARES" means the common shares of the Corporation;
"CORPORATION" has the meaning given to it above;
"EFFECTIVE DATE" has the meaning given to it in paragraph 1;
"FIRM SHARES" has the meaning given to it above;
"INDEMNIFIED PARTY" has the meaning given to it in subparagraph 10(1));
"INDEMNIFIER" has the meaning given to it in subparagraph 11(a);
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"MATERIAL SUBSIDIARIES" means Salix Pharmaceuticals, Inc. (a California
corporation) ("SPI") and Glycyx Pharmaceuticals, Ltd. (a Bermuda corporation)
("GPL");
"NOTICE" has the meaning given to it paragraph 20;
"NASD" means the National Association of Securities Dealers, Inc.;
"OSC" means the Ontario Securities Commission;
"PRELIMINARY PROSPECTUS" has the meaning given to it in paragraph 1;
"PREP INFORMATION" has the meaning given to it in paragraph 1;
"PREP PROCEDURES" has the meaning given to it in paragraph 1;
"PROSPECTUS" has the meaning given to it in paragraph 1;
"PROSPECTUS AMENDMENT" means any amendment to the Prospectus;
"PURCHASED SHARES" has the meaning given to it above;
"QUALIFYING PROVINCES" means all of the provinces of Canada;
"REGISTRATION STATEMENT" has the meaning given to it in paragraph 1;
"RULE 430A INFORMATION" has the meaning given to it in paragraph 1;
"RULES AND REGULATIONS" means the rules and regulations of the SEC under the
1933 Act;
"SEC" means the United States Securities and Exchange Commission;
"UNDERWRITER" and "UNDERWRITERS" have the respective meanings given to them
above;
"UNDERWRITING FEE" has the meaning given to it in paragraph 6;
"UNITED STATES" means the United States of America (including the states thereof
and the District of Columbia), and its territories, its possessions and other
areas subject to its jurisdiction;
"U.S. PERSONS" has the meaning ascribed thereto under Regulation S of the 1933
Act;
"U.S. PRELIMINARY PROSPECTUS" has the meaning given to it in paragraph 1;
"U.S. PROSPECTUS" has the meaning given to it in paragraph 1;
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"U.S. SECURITIES LAWS" means the 1933 Act, the 1934 Act and any applicable U.S.
state securities or "Blue Sky" laws; and
"U.S. SUPPLEMENTED PROSPECTUS" has the meaning given to it in paragraph 1.
Unless otherwise expressly provided in this Agreement, words importing only
the singular number include the plural and vice versa and words importing gender
include all genders. References to "paragraphs" or "subparagraphs" are to the
appropriate paragraph or subparagraph of this Agreement.
TERMS AND CONDITIONS
1. PROSPECTUS AND REGISTRATION STATEMENT
The Corporation has prepared and filed a preliminary prospectus dated
August 15, 1997 with respect to the Purchased Shares (the "Canadian Preliminary
Prospectus") under Canadian Securities Laws in the English language in each of
the Qualifying Provinces and in the French language in the Province of Quebec.
The Corporation has also prepared and filed with the SEC a registration
statement on Form S-1 (File No. 333-33781) with respect to the Purchased Shares
in conformity in all material respects with the requirements of the 1933 Act and
the Rules and Regulations and has filed with the SEC such amendments thereof as
may have been required to the date of this Agreement.
The Corporation has also elected to rely upon the rules and procedures
established pursuant to National Policy No. 44 of the Canadian Securities
Administrators for the pricing of securities after the final receipt for a
prospectus has been obtained (the "PREP Procedures") and Rule 430A under the
1933 Act and (a) has prepared and filed (i) in the English language in each of
the Qualifying Provinces and in the French language in the Province of Quebec, a
final prospectus omitting the PREP Information (as hereinafter defined) (in the
English and French languages, collectively, the "Canadian Final Prospectus") for
which a final National Policy No. 1 receipt has been obtained from the OSC and
(ii) with the SEC, an amendment to such registration statement, in which form
the Registration Statement became effective on _____, 1997 (the "Effective
Date"), and, (b) will prepare and file, promptly after the execution of this
Agreement (i) in the English language with each of the Canadian Securities
Regulatory Authorities and in the French language in the Province of Quebec, in
accordance with the PREP Procedures, the Canadian Final Prospectus supplemented
by the PREP Information (in the English and French languages, collectively, the
"Canadian Supplemented Prospectus") and (ii) with the SEC, a final prospectus in
accordance with Rule 430A and 424(b) of the Rules and Regulations (the "U.S.
Supplemented Prospectus"). The information, if any, included in the Canadian
Supplemented Prospectus that is omitted from the Canadian Final Prospectus, but
that is deemed under the PREP Procedures to be incorporated by reference into
the Canadian Final Prospectus as of the date of the Canadian Supplemented
Prospectus, is referred to herein as
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the "PREP Information". The information included in the U.S. Supplemented
Prospectus that is permitted, pursuant to Rule 430A of the Rules and
Regulations, to be omitted from the Registration Statement when it becomes
effective is referred to herein as the "Rule 430A Information".
As used in this Agreement: "Registration Statement" shall mean such
registration statement on Form S-1 filed with the SEC at the time such
registration statement became effective, including the exhibits thereto and the
documents incorporated by reference therein and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date, shall also mean
such registration statement as so amended; provided, however, that the
Registration Statement shall be deemed to include all Rule 430A Information
omitted from the prospectus filed as part of the Registration Statement and
contained in the U.S. Supplemented Prospectus; "U.S. Prospectus" shall mean the
prospectus in the form included in the Registration Statement, including the
documents incorporated by reference therein, except that from and after the time
the U.S. Supplemented Prospectus is filed with the SEC pursuant to Rule 424(b),
the term "U.S. Prospectus" shall mean such U.S. Supplemented Prospectus;
"Canadian Prospectus" shall mean the Canadian Final Prospectus for which a
receipt has been obtained from the OSC, except that from and after the time the
Canadian Supplemented Prospectus is filed with the OSC, the term "Canadian
Prospectus" shall mean such Canadian Supplemented Prospectus; "Preliminary
Prospectuses" shall mean (i) the Canadian Preliminary Prospectus and (ii) the
prospectus subject to completion in the form included in the registration
statement at the time of the initial filing of the registration statement with
the SEC, and as such prospectus shall have been amended from time to time prior
to the date of the U.S. Prospectus. The U.S. Supplemented Prospectus and the
Canadian Supplemented Prospectus are herein collectively called the
"Supplemented Prospectuses" and the U.S. Prospectus and the Canadian Prospectus
are herein collectively called the "Prospectuses".
2. (a) OFFER TO PURCHASE
Subject to the terms and conditions of this Agreement, the Underwriters
severally and not jointly offer to purchase from the Corporation, in the
proportions set forth in subparagraph 14(a), and by its acceptance of this
Agreement the Corporation agrees to issue and sell to the Underwriters the Firm
Shares, at the Closing Time on the Closing Date, at a price of Cdn. $_____ per
share, being an aggregate price of Cdn. $______. It is understood that the
agreement resulting from such offer relates to all, but not less than all, of
the Firm Shares to be purchased and sold hereto.
(b) ADDITIONAL SHARES
In addition, the Corporation hereby grants to the Underwriters, for the
sole purpose of covering over-allotments in the sale of Firm Shares by the
Underwriters, the option to purchase all or any part of the Additional Shares
for a purchase price of Cdn. $______ per share. This option may be exercised at
any time, in whole or in part, on or before the sixtieth day
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following the Closing Date, by written notice by the Underwriters to the
Corporation. Such notice shall set forth the aggregate number of Additional
Shares as to which the option is being exercised and the date and time, as
determined by the Underwriters, when the Additional Shares are to be delivered
(such date and time being herein sometimes referred to as the "Additional
Closing Date"); provided, however, that the Additional Closing Date shall not be
earlier than the Closing Date or earlier than the third Business Day after the
date on which the option shall have been exercised nor later than the fifth
Business Day after the date on which the option shall have been exercised.
Certificates for the Additional Shares shall be registered in such name or names
and in such authorized denominations as the Underwriters may request in writing
at least two full Business Days prior to the Additional Closing Date.
The portion of Additional Shares to be sold to each Underwriter shall be
the same portion of the Firm Shares being purchased by such Underwriter as set
forth opposite the name of such Underwriter in subparagraph 14(a) hereof.
(c) U.S. BROKER-DEALERS
It is understood that the Underwriters may, from time to time, sell any or
all of the Purchased Shares to NBC Levesque International Ltd., Yorkton Capital
Inc., Marleau Lemire (USA), Inc. or Midland Walwyn Capital Corporation
(together, the "U.S. Dealers"), who are broker-dealers registered as such with
the SEC under section 15 of the 1934 Act and members of the NASD, for
distribution in certain states of the United States which have been identified
to the Corporation. Any such sales by the Underwriters to U.S. Dealers shall be
at then applicable public offering price less the selling concession that would
apply if such sales were made by the Underwriters. Each of the U.S. Dealers
will be duly licensed broker-dealers in each jurisdiction in which it offers to
sell Purchased Shares. The Underwriters will not sell or distribute any
Purchased Shares in the United States, but may offer and sell Purchased Shares
in the United States through the U.S. Dealers in accordance with this Agreement
and applicable laws. The U.S. Dealers may not sell or distribute any Purchased
Shares in Canada.
3. RESTRICTIONS ON SALE
The Underwriters agree to not distribute the Purchased Shares in such a
manner as to require registration of the Purchased Shares or the filing of a
prospectus with respect to the Purchased Shares under the laws of any
jurisdiction other than the applicable laws of the Qualifying Provinces and the
applicable federal laws of the United States, and to only distribute the
Purchased Shares in the Qualifying Provinces and the United States in accordance
with all applicable laws, including the applicable state securities laws of the
United States. Sales in the United States will be limited to institutional
"accredited investors" within the meaning of Rule 501(a)(1), (2), (3) and (7)
under the 1933 Act. Any agreements between the Underwriters and the members of
any banking or selling group will contain restrictions similar to those
contained in this paragraph.
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For purposes of this paragraph 3, the Underwriters shall be entitled to
assume that the Purchased Shares are qualified for distribution in any
Qualifying Province where a receipt or other evidence of acceptance of the
Canadian Prospectus shall have been obtained from the applicable Canadian
Securities Regulatory Authority following the filing of the Canadian Prospectus.
The Underwriters shall (i) use all reasonable efforts to complete the
distribution in Canada as soon as possible after the Closing Date or Additional
Closing Date, as applicable; and (ii) notify the Corporation when, in their
opinion, the Underwriters have ceased distribution of the Purchased Shares and
provide a breakdown of the number of Purchased Shares distributed in each of the
Qualifying Provinces where such breakdown is required for the purpose of
calculating fees payable to the applicable Canadian Securities Regulatory
Authorities.
4. COVENANTS OF THE CORPORATION
The Corporation covenants and agrees with the Underwriters that:
(a) It shall fulfil all legal requirements to be fulfilled by the
Corporation to enable the Purchased Shares to be offered for sale and
sold to the public in (i) each of the Qualifying Provinces by or
through the Underwriters and other investment dealers and brokers who
comply with the applicable securities laws of the Qualifying Provinces
and (ii) in the states of the United States by the U.S. Dealers which
have been identified by the Underwriters prior to the signing of this
Agreement. The Corporation shall file the Canadian Supplemented
Prospectus with each of the Canadian Securities Regulatory Authorities
in accordance with the PREP Procedures and the U.S. Supplementary
Prospectus with the SEC in accordance with Rule 424(b) of the Rules
and Regulations, within all applicable required time frames and in any
event no later than _____, 1997, and will advise the Underwriters
promptly and, if requested by the Underwriters, will confirm such
advice in writing, when such filings have been made.
(b) It will advise the Underwriters promptly and, if requested by the
Underwriters, will confirm such advice in writing: (i) of any request
by any of the Canadian Securities Regulatory Authorities or the SEC,
as applicable, for any amendment of or supplement to the Registration
Statement, either of the Preliminary Prospectuses or the Prospectuses
or for additional information; (ii) of the issuance by the SEC of any
stop order suspending the effectiveness of the Registration Statement
or the issuance by any Canadian Securities Regulatory Authority, The
Toronto Stock Exchange or the SEC of any order having the effect of
ceasing or suspending the distribution of the Purchased Shares or the
trading in the Common Shares or the initiation, or the threatening, of
any proceeding for such purpose; and (iii) for the period of time
referred to in subparagraph 4(n), of any material change (or of any
circumstance in which there is a reasonable possibility that there has
been
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such a change) in the Corporation's condition (financial or other),
business, prospects, properties, net worth or results of operations,
or of the happening of any event in respect of the Corporation,
including the filing of any information, documents or reports pursuant
to Canadian Securities Laws or the 1934 Act, that (A) insofar as the
1933 Act is concerned, makes any statement of a material fact made in
the Registration Statement or the U.S. Prospectus (as then amended or
supplemented) untrue or which requires the making of any additions to
or changes in the Registration Statement or the U.S. Prospectus (as
then amended or supplemented) in order to state a material fact
required by the 1933 Act or the Rules and Regulations to be stated
therein or necessary in order to make the statements therein (1) in
the case of the Registration Statement, not misleading and (2) in the
case of the U.S. Prospectus (as then amended or supplemented), in
light of the circumstances under which they were made, not misleading,
or (B) insofar as Canadian Securities Laws are concerned, is, or may
be, of such a nature as would result in the Canadian Preliminary
Prospectus or the Canadian Prospectus or any amendment or supplement
thereto, as they are immediately prior to such change, containing a
misrepresentation or which would result in any of such documents, as
they are immediately prior to such change, not complying with the laws
of any Qualifying Province or which change would be expected to have a
significant effect on the market price or value of the Common Shares,
or (C) would result in the necessity to amend or supplement the
Prospectuses (as then amended or supplemented) to comply with the 1933
Act or Canadian Securities Laws, as applicable.
(c) If at any time the SEC shall issue or propose to enter any stop order
suspending the effectiveness of the Registration Statement, or any of
the SEC, any Canadian Securities Regulatory Authority or The Toronto
Stock Exchange shall issue or propose to issue any order having the
effect of ceasing or suspending the distribution of the Purchased
Shares or the trading in the Common Shares, the Corporation will make
every commercially reasonable effort to prevent the issuance of any
such order and, if issued, to obtain the withdrawal of such order at
the earliest possible time.
(d) If, during such period after the first date of the public offering of
the Purchased Shares as in the opinion of counsel to the Underwriters
the U.S. Prospectus or the Canadian Prospectus is required by law to
be delivered in connection with sales by an Underwriter or dealer, any
event shall occur or condition exist as contemplated by subparagraph
4(b)(iii) hereto or if, in the reasonable opinion of counsel to the
Underwriters, it is necessary to amend or supplement the Canadian
Prospectus or the U.S. Prospectus to comply with Canadian Securities
Laws, the 1933 Act or the Rules and Regulations, it will forthwith
prepare, file with the SEC and the Canadian Securities Regulatory
Authorities and furnish, at its own expense, to the Underwriters and
to the
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dealers (whose names and addresses the Underwriters will furnish to
the Corporation) to which Purchased Shares may have been sold by the
Underwriters and to any other dealers upon request, either amendments
or supplements to the U.S. Prospectus or the Canadian Prospectus (to
be effected, if necessary, by the filing with the SEC of a post-
effective amendment to the Registration Statement) so that the
statements in the U.S. Prospectus or the Canadian Prospectus as so
amended or supplemented will not in the light of the circumstances
when the U.S. Prospectus or the Canadian Prospectus is delivered to a
purchaser, be misleading or so that the U.S. Prospectus or the
Canadian Prospectus, as amended or supplemented, will comply with the
Canadian Securities Laws and U.S. Securities Laws; in the event that
the Corporation and the Underwriters agree that the Prospectuses
should be amended or supplemented, the Corporation, if requested by
the Underwriters, will promptly issue a press release announcing or
disclosing the matters to be covered by the proposed amendment or
supplement.
(e) Until the distribution of the Purchased Shares shall have been
completed, it shall promptly take or cause to be taken all additional
steps and proceedings that from time to time may be required under
Canadian Securities Laws to continue to qualify the Purchased Shares
for distribution under the Canadian Prospectus, or in the event that
the Purchased Shares have, for any reason, ceased to so qualify, to
again so qualify the Purchased Shares.
(f) It will file such consents to service of process or other documents
necessary or appropriate in order to effect the registration or
qualification of the Purchased Shares in the Qualifying Provinces and
the United States; provided that in no event shall the Corporation be
obligated to qualify to do business in any jurisdiction where it is
not now otherwise required to be so qualified or to take any action
that would subject it to service of process in suits, other than those
arising out of the offering or sale of the Purchased Shares, in any
jurisdiction where it is not now so subject.
(g) It will make generally available to its security holders (within the
meaning of Rule 158 of the Rules and Regulations) an earnings
statement, which need not be audited, covering a twelve-month period
commencing after the effective date of the Registration Statement and
ending not later than 15 months thereafter, as soon as practicable
after the end of such period, which earnings statement shall satisfy
the provisions of Section 11(a) of the 1933 Act.
(h) During the period of three years hereafter, it will furnish to the
Underwriters (i) as soon as available, a copy of each report of the
Corporation mailed to shareholders or filed with the SEC or the
Canadian Security Regulatory Authorities and (ii) every material press
release and every material news item
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or article in respect of the Corporation or its affairs which was
generally released to its shareholders or prepared for general release
by the Corporation.
(i) For a period of 90 days after the Closing Date (the "Lock-Up Period"),
it will not, directly or indirectly, without the prior written consent
of Levesque, on behalf of the Underwriters, which consent shall not be
unreasonably withheld, issue or sell any Common Shares or any right to
acquire Common Shares, except that the Corporation may (i) grant
options to purchase Common Shares pursuant to the Corporation's stock
option plans and (ii) may issue Common Shares pursuant to the exercise
of previously granted options and may issue securities of the
Corporation, including its Common Shares in connection with in-
licensing arrangements or similar acquisitions by the Corporation of
products, rights, assets or shares.
(j) It will furnish to the Underwriters, without charge:
(i) upon execution and delivery of this Agreement, a copy of the
Canadian Preliminary Prospectus and the Canadian Prospectus,
and concurrently with the filing thereof with the Canadian
Securities Regulatory Authorities, the Canadian Supplemented
Prospectus, in each case in the English language signed and
certified as required by Canadian Securities Laws and including
the documents incorporated therein by reference, if any;
(ii) upon execution and delivery of this Agreement, a copy of the
Canadian Preliminary Prospectus and the Canadian Prospectus,
and concurrently with the filing thereof with the Commission
des valuers mobilieres du Quebec, the Canadian Supplemented
Prospectus, in each case in the French language signed and
certified as required by the Canadian Securities Laws
applicable in Quebec and including the documents incorporated
therein by reference, if any;
(iii) upon execution and delivery of this Agreement, a copy of the
Registration Statement and any amendments thereto (including
exhibits) prior to effectiveness thereof, and the Registration
Statement (including exhibits), signed as required by the 1933
Act and the Rules and Regulations and such number of conformed
copies thereof, but without exhibits, as the Underwriters may
request;
(iv) upon execution and delivery of the Agreement, a copy of the
U.S. Preliminary Prospectus and the U.S. Prospectus, and
concurrently with the filing thereof with the SEC, the U.S.
Supplemented Prospectus;
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(v) during the period described in subparagraph 4(n) hereof, upon
filing thereof, a copy of any other document required to be
filed by the Corporation under the 1933 Act or the Canadian
Securities Laws;
(vi) upon execution and delivery of this Agreement, legal opinions
dated the date of the Canadian Preliminary Prospectus and the
Canadian Prospectus, and at the time of delivery to the
Underwriters pursuant to this paragraph 4 of the Canadian
Supplemented Prospectus or any amendment or supplement to the
Canadian Prospectus, a legal opinion dated the date of the
Canadian Supplemented Prospectus or such amendment or
supplement, in form and substance satisfactory to the
Underwriters, addressed to the Underwriters, the Corporation,
their respective counsel, and the Chief Financial Officer and
the directors of the Corporation from Mendelsohn Rosentzveig
Shacter, to the effect that the French language version of each
of the Canadian Preliminary Prospectus, the Canadian
Prospectus, the Canadian Supplemented Prospectus or any such
amendment or supplement, together with all documents
incorporated therein by reference is, in all material respects
(except for any capitalization tables, financial statements,
notes to financial statements and auditors reports, selected
and summary financial and operating data and management's
discussion and analysis of financial condition and results of
operations (collectively, the "Financial Information"), a
complete and accurate translation of the English language
version thereof, and that the English and French language
versions are not susceptible of any materially different
interpretation with respect to any material matter contained
therein;
(vii) upon execution and delivery of this Agreement, opinions dated
the date of the Canadian Preliminary Prospectus and the
Canadian Prospectus, and at the time of delivery to the
Underwriters pursuant to this paragraph 4 of the Canadian
Supplemented Prospectus or any amendment or supplement to the
Canadian Prospectus, an opinion dated the date of the Canadian
Supplemented Prospectus or such amendment or supplement, in
form and substance satisfactory to the Underwriters, addressed
to the Underwriters, the Corporation, their respective counsel
and the directors of the Corporation from the Corporation's
auditors to the effect that the French language version of the
Financial Information set forth in each of the Canadian
Preliminary Prospectus, the Canadian Prospectus, the Canadian
Supplemented Prospectus or any such amendment or supplement is,
in all material respects, a complete and accurate translation
of the English language version thereof;
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(viii) at the time of delivery to the Underwriters pursuant to this
paragraph 4 of the U.S. Supplemented Prospectus and the
Canadian Supplemented Prospectus or any amendment or supplement
thereto, a "long-form" comfort letter dated the date of such
Prospectuses or such amendment or supplement, in form and
substance satisfactory to the Underwriters, addressed to the
Underwriters and the Chief Financial Officer and the directors
of the Corporation from the auditors of the Corporation, with
respect to certain financial and accounting information
relating to the Corporation in the Prospectuses or such
amendment or supplement, which letter shall be in addition to
the auditors' report contained in such documents and the
auditors' comfort letter addressed to the Canadian Securities
Regulatory Authorities; and
(ix) as soon as possible, but in no event later than the second
Business Day after the date hereof, a legal opinion dated the
date of the Canadian Supplemented Prospectus, in form and
substance satisfactory to the Underwriters, addressed to the
Underwriters from Mendelsohn Rosentzveig Shacter, regarding
compliance with the laws of Quebec relating to the use of the
French language in connection with the distribution of the
Purchased Shares.
(k) Concurrently with the delivery of any Prospectus Amendments pursuant
to subparagraph (d) hereto, the Corporation shall deliver to the
Underwriters, with respect to such Prospectus Amendments, documents
similar to those referred to in subparagraphs 4(k)(vi), (vii), (viii),
(ix) and (x).
(l) It will not (i) file any amendment to the Registration Statement or
make or file any amendment or supplement to the Prospectuses of which
the Underwriters shall not previously have been advised or to which
the Underwriters shall reasonably object in writing after being so
advised or (ii) so long as, in the written opinion of counsel for the
Underwriters (a copy of which shall be delivered to the Corporation) a
prospectus is required to be delivered in connection with sales by any
Underwriter or dealer, file any information, documents or reports
pursuant to Canadian Securities Laws or the 1934 Act, without
delivering a copy of such information, documents or reports to
Levesque, as representative of the Underwriters, prior to or
concurrently with such filing.
(m) As soon after the execution and delivery of this Agreement as possible
and thereafter from time to time for such period as in the written
opinion of counsel for the Underwriters a Prospectus is required by
the 1933 Act or Canadian Securities Laws, as applicable, to be
delivered in connection with sales by any Underwriter or dealer, the
Corporation will expeditiously deliver to each Underwriter and each
dealer, without charge, as many copies of the
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Canadian Prospectus, as applicable (and of any amendment or supplement
thereto) and in such cities as the Underwriters may request. The
Corporation consents to the use of the Prospectuses (and of any
amendment or supplement thereto) in accordance with the provisions of
U.S. Securities Laws and Canadian Securities Laws, both in connection
with the offering and sale of the Purchased Shares and for such period
of time thereafter as the U.S. Prospectus or the Canadian Prospectus,
as applicable, is required by the 1933 Act or Canadian Securities Laws
to be delivered in connection with sales by any Underwriter or dealer.
If during such period of time any event of the type described in
paragraph 4(b) hereof shall occur, or if it is necessary to supplement
or amend the Prospectuses to comply with the 1933 Act, Canadian
Securities Laws or any other law, the Corporation will forthwith
furnish to the Underwriters and dealers such number of copies thereof
as the Underwriters may request.
(n) Prior to the filing of the Prospectuses, and any amendments or
supplements thereto, the Corporation shall allow the Underwriters and
their counsel to participate fully in the preparation of such
documents, and shall have allowed the Underwriters and their counsel
to conduct all due diligence which the Underwriters may require to
conduct in order to fulfil their obligations as underwriters and in
order to enable the Underwriters responsibly to execute any
certificate required to be executed by the Underwriters with respect
to the Canadian Prospectus, and any amendments or supplements thereto,
which certificate the Underwriters agree to execute unless they have a
reasonable reason for not doing so.
5. REPRESENTATIONS AND WARRANTIES
The Corporation represents and warrants to, and agrees with, each
Underwriter that:
(a) The Corporation meets the general eligibility requirements for use of
Form S-1 under the 1933 Act and is eligible to file a prospectus with
the Canadian Securities Regulatory Authorities and to use the PREP
Procedures.
(b) The Corporation has prepared and filed a submission to jurisdiction
and an appointment of agent for service of process in the form
required by Canadian Securities Regulatory Authorities in conjunction
with the filing of the Canadian Prospectus.
(c) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or, to
the Corporation's knowledge, threatened by the SEC. No Canadian
Securities Regulatory Authority, nor any stock exchange in Canada or
any court has issued an order preventing or
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suspending the use of the Canadian Preliminary Prospectus, the U.S.
Preliminary Prospectus, the Canadian Prospectus or the U.S. Prospectus
or preventing the distribution of the Purchased Shares or instituted
proceedings for that purpose.
(d) (i) the Corporation complies with the laws of its jurisdiction of
incorporation, except where the failure to so comply would not have a
material adverse effect; (ii) the Canadian Preliminary Prospectus and
the Canadian Final Prospectus comply and the Canadian Supplemented
Prospectus will comply in all material respects with the requirements
of all applicable Canadian Securities Laws; the Canadian Supplemented
Prospectus, together with any documents filed in connection therewith
and all documents incorporated by reference therein and the U.S.
Supplemented Prospectus will have been delivered to the Underwriters
within two business days after the date of this Agreement; (iii)
insofar as Canadian Securities Laws are concerned, the Canadian
Prospectus and any amendments thereof and supplements thereto
constitute or will constitute full, true and plain disclosure of all
material facts relating to the Corporation and its Material
Subsidiaries taken as a whole, and the Purchased Shares, and does not
or will not include 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 in order to make a statement not misleading in the
light of the circumstances under which it is made; (iv) at the time of
the effectiveness of the Registration Statement or the effectiveness
of any post-effective amendment to the Registration Statement, and at
the Closing Date and the Additional Closing Date, if any, the
Registration Statement and the U.S. Prospectus and any amendments
thereof and supplements thereto comply or will comply in all material
respects with the applicable provisions of U.S. Securities Laws and do
not or will not contain an untrue statement of a material fact and do
not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (A) in
the case of the Registration Statement, not misleading and (B) in the
case of the U.S. Prospectus, in light of the circumstances under which
they were made, not misleading; provided, however, that this
representation and warranty shall not apply to statements contained in
the second, fourth, fifth, ninth or tenth paragraphs of the section of
the Prospectuses entitled "Plan of Distribution", the table included
in the section entitled "Underwriting" which identifies the
underwriters and the allocation of the Shares among them, or the
information in the last paragraph of the outside front cover page of
the U.S. Prospectus and the last two paragraphs of the outside front
cover page of the Canadian Prospectus.
(e) the consolidated financial statements of the Corporation (including
all notes and schedules thereto) included (or incorporated by
reference) in the Registration Statement and the Prospectuses present
fairly the financial
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<PAGE>
position, the results of operations, retained earnings, and changes in
financial position and the other information purported to be shown
therein of the Corporation on a consolidated basis at the respective
dates and for the respective periods to which they apply; and such
financial statements have been prepared in conformity with accounting
principles generally accepted in the United States, consistently
applied throughout the periods involved, and all adjustments necessary
for a fair presentation of the results for such periods have been
made. The summary financial data included in the Prospectuses present
fairly the information shown therein and have been compiled on a basis
consistent with that of the audited consolidated financial statements
of the Corporation and its Material Subsidiaries included in the
Prospectuses.
(f) Ernst & Young, LLP who are reporting upon the audited financial
statements of the Corporation included in the Registration Statement
and the Prospectuses, are, and during the periods covered by their
reports were, auditors of the Corporation and independent with respect
to the Corporation within the meaning of the laws of its jurisdiction
of incorporation and applicable Canadian Securities Laws, and are
independent auditors as required by the 1933 Act and the Rules and
Regulations.
(g) The Corporation and each of the Material Subsidiaries has been duly
organized and is validly existing as a corporation under the laws of
its respective jurisdiction of incorporation. The Corporation and
each of the Material Subsidiaries are duly registered and qualified to
transact business and are in good standing as foreign corporations in
each jurisdiction in which the character or location of their
respective assets or properties (owned, leased or licensed) or the
nature of their respective businesses makes such qualification
necessary, except where the failure to so register or qualify would
not have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Corporation and the Material Subsidiaries, taken as
a whole. The Corporation and each of the Material Subsidiaries have
all requisite corporate power and authority, and all necessary
authorization, approvals, consents, orders, licenses, certificates and
permits of and from all governmental or regulatory bodies or any other
person or entity (collectively, "Permits"), to own, lease, operate and
license their assets and properties and to the conduct of their
businesses as now being conducted and as described in the Registration
Statement and the Prospectuses, except where the failure to have any
such Permit would not have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Corporation and the Material
Subsidiaries, taken as a whole, and no such Permit contains a
materially burdensome restriction not adequately disclosed in the
Registration Statement and the Prospectuses; and the Corporation has
all such corporate power and authority, and such Permits to enter
into, deliver and perform this
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<PAGE>
Agreement and to issue and sell the Purchased Shares (except for
requirements of The Toronto Stock Exchange and requirements under the
Canadian Securities Laws and the U.S. Securities Laws which will be
satisfied on or prior to the Closing Date or the Additional Closing
Date, as applicable).
(h) All necessary corporate action has been duly and validly taken by the
Corporation to authorize the execution, delivery and performance of
this Agreement and the issuance and sale of the Purchased Shares by
the Corporation. This Agreement has been duly and validly authorized,
executed and delivered by the Corporation and constitutes a legal,
valid and binding obligation of the Corporation and is enforceable in
accordance with its terms, except as enforcement of this Agreement may
be limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors and except as limited
by the application of equitable principles when equitable remedies are
sought.
(i) No authorization, approval, consent or license of any government,
governmental instrumentality or court in Canada or in the United
States (other than requirements of The Toronto Stock Exchange and
requirements under the U.S. Securities Laws and Canadian Securities
Laws which will be satisfied prior to the Closing Date or the
Additional Closing Date, as applicable), is required for the
execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby including the
valid authorization, issuance, sale and delivery of the Purchased
Shares as contemplated by the Prospectuses.
(j) The Corporation and the Material Subsidiaries own or have a valid
license to use all patents, patent applications, inventions,
trademarks, trade names, registrations and applications for
registration of trademarks, service marks, service mark registrations
and applications for registration, copyrights, copyright registrations
and applications for registration, know-how, manufacturing processes,
formulae, trade secrets, licenses and rights in any of the foregoing
and any other intangible property and assets (herein called the
"Proprietary Rights") which are material to the businesses of the
Corporation and the Material Subsidiaries as now conducted and as
proposed to be conducted, in each case as described in the
Prospectuses. The description of the Proprietary Rights in the
Prospectuses is correct in all material respects and fairly and
correctly describes the Corporation's and the Material Subsidiaries'
rights with respect thereto. The Corporation does not have any
knowledge of, and the Corporation has not given or received an notice
of, any pending conflicts with or infringement of the rights of others
with respect to the Corporation's and the Material Subsidiaries' use
of any Proprietary Rights or with respect to any license of the
Corporation's and the Material Subsidiaries of Proprietary Rights.
Except as disclosed in the Prospectuses,
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<PAGE>
no action, suit, arbitration, or legal, administrative or other
proceeding, or investigation is pending or, to the best knowledge of
the Corporation, threatened, which involves any Proprietary Rights.
Except as disclosed in the Prospectuses, neither the Corporation nor
any Material Subsidiary is subject to any judgment, order, writ,
injunction or decree of any court or any federal, provincial, state,
local, foreign or other governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, or any
arbitrator, or has entered into or is a party to any contract which
restricts or impairs the use of any such Proprietary Rights in a
manner which would have a material adverse effect on the use of any of
the Proprietary Rights. To the best knowledge of the Corporation, no
Proprietary Rights used by the Corporation or any of the Material
Subsidiaries, and no services or products sold by the Corporation or
any of the Material Subsidiaries, conflict with or infringe upon any
Proprietary Rights available to any third party. Neither the
Corporation nor any Material Subsidiary has entered into any consent,
indemnification, forbearance to sue or settlement agreement with
respect to Proprietary Rights other than in the ordinary course of
business. No claims have been asserted by any person with respect to
the validity of the Corporation's or any of the Material Subsidiaries'
ownership or right to use the Proprietary Rights and, to the best
knowledge of the Corporation, there is no basis for any such claim to
be successful. The Proprietary Rights are valid and enforceable and
no registration relating thereto has lapsed, expired or has been
abandoned or cancelled or is the subject of cancellation or other
adversarial proceedings, and all applications therefore are pending
and are in good standing. The Corporation and the Material
Subsidiaries have complied, in all material respects, with their
respective contractual obligations relating to the protection of the
Proprietary Rights used pursuant to licenses. To the best knowledge
of the Corporation, no person is infringing on or violating the
Proprietary Rights owned or used by the Corporation or any of the
Material Subsidiaries.
(k) The Corporation and the Material Subsidiaries have good title to each
of the items of real and personal property which are reflected in the
financial statements referred to in subparagraph 5(e) or are referred
to in the Registration Statement and the Prospectuses as being owned
by them and valid and enforceable leasehold interests in each of the
items of real and personal property which are referred to in the
Registration Statement and the Prospectuses as being leased by them,
in each case free and clear of all liens, encumbrances, claims,
security interests and defects, other than those described in the
Registration Statement and the Prospectuses or those which do not and
will not have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Corporation and the Material Subsidiaries, taken as
a whole.
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<PAGE>
(l) Except as disclosed in the Registration Statement and the
Prospectuses, there is no litigation or governmental or other
proceeding or investigation at law or in equity before any court or
before or by any federal, provincial, state, municipal or other
governmental or public department, commission, board, agency or body,
domestic or foreign, pending or, to the Corporation's best knowledge,
threatened (and the Corporation does not know of any basis therefor)
against, or involving the assets, properties or business of, the
Corporation or any subsidiary which would materially adversely affect
the value or the operation of any such assets or properties or the
business, results of operations, prospects or condition (financial or
otherwise) of the Corporation and the Material Subsidiaries, taken as
a whole, nor are there any matters under discussion with any
government authority relating to taxes, governmental charges or
assessments asserted by any such authority.
(m) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectuses, except as described
therein, (i) there has not been any material adverse change in the
condition (financial or otherwise) or in the assets, properties,
business, results of operations or prospects of the Corporation and
the Material Subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business; (ii) the
Corporation and the Material Subsidiaries, taken as whole, have not
sustained any material loss or interference with their assets,
businesses or properties (whether owned or leased) from fire,
explosion, earthquake, flood or other calamity, whether or not covered
by insurance, or from any labour dispute or any court or legislative
or other governmental action, order or decree; and (iii) since the
date of the latest balance sheet included in or incorporated by
reference into the Registration Statement and the Prospectuses, except
as reflected therein, neither the Corporation nor any of the Material
Subsidiaries has (A) issued any shares out of treasury (other than
upon the exercise of share options issued under the Corporation's
employee share option plans or upon the exercise of previously issued
warrants which were described in the Prospectuses) or incurred any
liabilities or obligation, direct or contingent, for borrowed money,
except such liabilities or obligations incurred in the ordinary course
of business or (B) declared or paid any dividend or made any
distribution on of its shares or redeemed, purchased or otherwise
acquired or agreed to redeem, purchase or otherwise acquire any of its
shares.
(n) None of the Corporation, any of the Material Subsidiaries, or, to the
Corporation's knowledge, any other party to any agreement, lease,
contract, mortgage, loan agreement, note indenture or other instrument
or obligation to which the Corporation or any of the Material
Subsidiaries is a party or by which the Corporation or any of the
Material Subsidiaries or any of their respective properties is bound,
is in breach of or in default in the observance
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<PAGE>
or performance of any term or obligation to be performed by it under
any agreement, lease, contract, mortgage, loan agreement, note
indenture or other instrument or obligation to which the Corporation
or any of the Material Subsidiaries is a party or by which the
Corporation or any of the Material Subsidiaries or any of their
respective properties is bound and which breach or default, singularly
or in the aggregate, if not cured or otherwise corrected within the
respective period specified for such cure or correction, would have a
material adverse effect on the assets or properties, business, results
of operations, prospects or condition (financial or otherwise) of the
Corporation and the Material Subsidiaries, taken as a whole, and no
event as it relates to the Corporation or any of the Material
Subsidiaries, and to the Corporation's knowledge no event as it
relates to any other party, has occurred which with notice or lapse of
time or both would constitute such a breach or default, in any such
case which such breach or default or event would have a material
adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the
Corporation and the Material Subsidiaries, taken as a whole.
(o) Neither the Corporation nor any of the Material Subsidiaries is in
violation of (i) any term or provision of its charter or by-laws or
(ii) any franchise, license, permit, judgment, decree, order, statute,
rule or regulation, except, in the case of clause (ii) hereof, where
the consequence of such violation would not have a material adverse
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Corporation and
the Material Subsidiaries, taken as a whole.
(p) All of the outstanding shares of each Material Subsidiary have been
duly authorized and validly issued and are fully paid and
nonassessable. All of the outstanding shares of each Material
Subsidiary are beneficially owned by the Corporation, directly or
indirectly, as described in the Prospectus, free and clear of any
charge, lien, pledge, security interest, equity or encumbrance of any
kind (other than restrictions on transfer under applicable U.S.
Securities Laws).
(q) All of the outstanding shares of the Corporation have been duly
authorized and validly issued and are fully paid and non-assessable;
none of the outstanding shares is subject to, or was issued in
violation of, the preemptive rights of any shareholder of the
Corporation; the Purchased Shares, when issued, delivered and sold in
accordance with this Agreement, will be duly and validly issued and
outstanding, fully paid and non-assessable, and will not have been
issued in violation of or be subject to any preemptive rights of any
shareholder of the Corporation; no holder of securities of the
Corporation has any rights to the registration of securities of the
Corporation as a result of the filing of the Registration Statement or
the Prospectuses or otherwise in
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<PAGE>
connection with the sale of the Purchased Shares contemplated hereby;
the Corporation had, at June 30, 1997, an authorized and outstanding
capitalization as set forth in the Registration Statement and the
Prospectuses under the caption "Capitalization"; the Common Shares of
the Corporation conform in all material respects to the description
thereof contained in the Registration Statement and the Prospectuses;
there are no outstanding options, warrants or other rights calling for
the issuance of, and there are no commitments, plans or arrangements
to issue, any Common Shares or any security convertible into or
exchangeable or exercisable for Common Shares other than as described
in the Prospectuses.
(r) The Company has filed in a timely manner each document or report
incorporated by reference in the Prospectuses under the Canadian
Securities Laws; each such document or report at the time it was filed
conformed, as applicable, to the requirements of the Canadian
Securities Laws; and none of such documents or reports contained an
untrue statement of any material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading.
(s) Neither the execution, delivery and performance of this Agreement by
the Corporation nor the consummation of any of the transactions
contemplated thereby (including, without limitation, the issuance and
sale by the Corporation of the Purchased Shares) will give rise to a
right to terminate or accelerate the due date of any payment due
under, or conflict with or result in the breach of any term or
provision of, or constitute a default under, or require any consent or
waiver under, or result in the execution or imposition of any lien,
charge or encumbrance upon any properties or assets of the Corporation
or any of the Material Subsidiaries pursuant to the terms of, any
indenture, mortgage, deed or trust or other agreement or instrument to
which the Corporation or any of the Material Subsidiaries is a party
or by which any of them or any of their respective properties or
businesses is bound, or any franchise, license, permit, judgment,
decree, order, statute, rule or regulation applicable to the
Corporation or any of the Material Subsidiaries or violate any
provisions of the charter or by-laws of the Corporation or any of the
Material Subsidiaries.
(t) Neither the Corporation nor any of the Material Subsidiaries is
involved in any labour dispute nor, to the knowledge of the
Corporation, is any such dispute threatened, which dispute would have
a material adverse effect on the assets or properties, business,
results of operations, prospects or condition (financial or otherwise)
of the Corporation and the Material Subsidiaries, taken as a whole.
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<PAGE>
(u) To the best of the Corporation's knowledge in respect of shareholders
of the Corporation and their affiliates (other than the Corporation),
no transaction has occurred between (i) the Corporation and any of its
shareholders, officers or directors, or (ii) the Corporation and any
affiliate or affiliates of any such shareholder, officer or director,
that is required to be described in and is not described in the
Registration Statement and the Prospectuses.
(v) The Corporation has filed all tax returns which are required to be
filed with any government authority through the date hereof, or has
received extensions thereof, and has paid all taxes shown on such
returns and all assessments received by it to the extent that the same
are material and have become due.
(w) The Corporation has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida).
(x) The Corporation is not, and upon consummation of the transactions
contemplated hereby will not be, an "investment company" as such term
is defined in the United States Investment Company Act of 1940, as
amended.
(y) The Corporation is not a passive foreign investment company ("PFIC")
or foreign personal holding company ("FPHC") within the meaning of
Sections 1296 and 552 of the U.S. Internal Revenue Code of 1986, as
amended, and the Corporation is not aware of any contemplated action
by any shareholder or shareholders of the Corporation which would
cause the Corporation to become a PFIC and/or FPHC.
(z) Except as set forth in the Registration Statement and the
Prospectuses, the Corporation and its Material Subsidiaries are in
compliance with any and all applicable foreign, federal, provincial,
state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"), have received all permits, licenses or other approvals
required of them under applicable Environmental Laws to conduct their
respective businesses and are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required
permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not,
singularly or in the aggregate, have a material adverse effect on the
Corporation and its Material Subsidiaries, taken as a whole.
(aa) Except as set forth in the Registration Statement and the
Prospectuses, the costs and liabilities under Environmental Laws
(including, without limitation, any capital or operating expenditures
required for clean-up, closure of
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<PAGE>
properties or compliance with Environmental Laws or any permit,
license or approval, any related constraints on operating activities
and any potential liabilities to third parties) would not, singularly
or in the aggregate, have a material adverse effect on the Corporation
and its Material Subsidiaries, taken as a whole.
(bb) The Purchased Shares have received conditional approval for listing on
The Toronto Stock Exchange.
(cc) The Corporation has not taken and will not take, directly or
indirectly, any action designed to, or that might be expected to,
cause or result in stabilization or manipulation of the price of the
Common Shares. The Corporation has not distributed and will not
distribute any prospectus (as such term is defined in Canadian
Securities Laws and the Rules and Regulations) in connection with the
offering of the Purchased Shares other than the Preliminary
Prospectuses and the Prospectuses filed with the Canadian Securities
Regulatory Authorities and the SEC.
6. SERVICES PROVIDED BY UNDERWRITERS AND UNDERWRITING FEE
In return for the Underwriters' agreement to purchase the Firm Shares which
will result from the acceptance of this offer by the Corporation and in
consideration of the services to be rendered by the Underwriters in connection
therewith, including, without limitation, acting as financial advisors to the
Corporation, in assisting in the preparation of documentation relating to the
Firm Shares, including the Registration Statement and the Prospectuses (and any
amendments therefor supplements thereto), in advising on the final terms and
conditions of the Firm Shares, in performing and managing banking, selling or
other groups for the sale of the Firm Shares, in distributing the Firm Shares,
both directly and to other registered dealers and brokers, co-ordinating sales
in the United States through the U.S. Dealers and in performing administrative
work in connection with the distribution of the Firm Shares, the Corporation
agrees to pay the Underwriters at the Closing Time a fee of 6.5% of the
aggregate purchase price set forth in subparagraph 7(a) below (the "Underwriting
Fee") out of the general funds of the Corporation and, if any Additional Shares
are purchased by the Underwriters pursuant to paragraph 2(b) hereof, an
additional fee of 6.5% of the aggregate purchase price of the Additional Shares
out of the general funds of the Corporation (the "Additional Underwriting Fee").
Such fees shall be payable as provided for in subparagraph 7(a).
The Underwriters will be permitted to appoint other registered investment
dealers and brokers (or other investment dealers and brokers duly qualified in
their respective jurisdictions) as their agents to assist in offering the
Purchased Shares and the Underwriters may determine the remuneration payable by
the Underwriters to such other investment dealers and brokers appointed by them.
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<PAGE>
7. (a) DELIVERY OF THE SHARES AND PAYMENT THEREFOR
Delivery to the Underwriters of and payment for the Firm Shares and payment
of the Underwriting Fee to the Underwriters by certified cheque or bank draft
shall be made at the offices of Aird & Berlis, Toronto, Ontario, on the Closing
Date.
Certificates for the Firm Shares to be purchased hereunder shall be
registered in such names and in such denominations as the Underwriters shall
request by written notice prior to _____ a.m., _______ time, on the third
Business Day preceding the Closing Date. Such certificates shall be made
available to the Underwriters in Toronto, as the Underwriters may direct in such
written notice, for inspection and packaging not later than _____ a.m., _______
time, on the Business Day preceding the Closing Date. The certificates
evidencing the Firm Shares to be purchased hereunder shall be delivered to the
Underwriters on the Closing Date against payment to the Corporation, or as the
Corporation may direct to the Underwriters in writing not less than 24 hours
prior to the Closing Date, of the purchase price therefor, in the case of Firm
Shares, by certified or official bank cheque or cheques payable in same day
funds and made payable as the Underwriters may direct to the Corporation in
writing not less than 24 hours prior to the Closing Date.
In the event that the Underwriters elect to purchase any Additional Shares
pursuant to paragraph 2(b) hereof, the location of the Additional Closing, the
delivery of the certificate(s) representing the Additional Shares, the payment
by the Underwriters to the Corporation of the aggregate purchase price for the
Additional Shares and the payment of the Additional Underwriting Fee by the
Corporation to the Underwriters shall be effected in the same manner as set
forth in the preceding paragraphs in connection with the closing of the purchase
of the Firm Shares.
(b) EXPENSES OF TRANSFER AGENT
The Corporation shall pay all fees and expenses payable to Montreal Trust
Company of Canada in connection with the preparation, delivery, certification
and exchange of the Purchased Shares contemplated by this paragraph and the fees
and expenses payable to Montreal Trust Company of Canada in connection with the
initial or additional transfers as may be required in the course of the
distribution of the Firm Shares and any Additional Shares.
8. CONDITIONS
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date, and the Additional Shares, if any, on the Additional Closing
Date, shall be subject to the accuracy of the representations and warranties in
all material respects of the Corporation contained in this Agreement as of the
date of this Agreement and as of the Closing Date or the Additional Closing
Date, as the case may be (except for representations
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and warranties which are made in reference to a specific date), the performance
by the Corporation of its obligations under this Agreement and the following
additional conditions:
(a) All legal requirements to be fulfilled by the Corporation to enable
the Purchased Shares to be offered for sale and sold to the public in
each of the Qualifying Provinces by or through the Underwriters and
other investment dealers and brokers who comply with applicable
Canadian Securities Laws in the Qualifying Provinces shall have been
complied with, in all material respects, including the obtaining of a
receipt from the OSC under National Policy No.1 of the Canadian
Securities Administrators ("NP 1") and the Canadian Securities
Regulatory Authorities in such of the other Qualifying Provinces, if
any, that have opted out of the NP 1 receipt system. Not later than
the second Business Day following the date of this Agreement, the
Canadian Supplemented Prospectus shall have been filed with the
Canadian Securities Regulatory Authorities in accordance with the PREP
Procedures, and the U.S. Supplemented Prospectus shall have been filed
with the SEC in accordance with Rule 424(b) of the Rules and
Regulations; no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall
have been issued and no proceeding for that purpose shall have been
instituted or, to the knowledge of the Corporation or any Underwriter,
threatened by the SEC; no order having the effect of ceasing or
suspending the distribution of the Purchased Shares shall have been
issued by any Canadian Securities Regulatory Authority or stock
exchange in Canada and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Corporation or any Underwriter,
threatened by any Canadian Securities Regulatory Authority or stock
exchange in Canada; and all requests for information. on the part of
the Canadian Securities Regulatory Authorities and the SEC shall have
been complied with to the satisfaction of the Underwriters.
(b) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to counsel to the
Underwriters, acting reasonably, addressed to the Underwriters from
British Virgin Islands counsel to the Corporation, Harney Westwood &
Riegels, as to the laws of the British Virgin Islands, which counsel
in turn may rely as to matters of fact, on certificates of the
auditors of the Corporation, public and stock exchange officials and
officers of the Corporation, with respect to the following matters:
(i) the Corporation has been duly incorporated and is validly
subsisting under the laws of its jurisdiction of incorporation.
The Corporation is duly qualified and in good standing as a
foreign or extraprovincial corporation in each jurisdiction in
which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its
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<PAGE>
business makes such qualification necessary, except for those
failures to be so qualified or in good standing which will not
in the aggregate have a material adverse effect on the
Corporation and its Material Subsidiaries taken as a whole;
(ii) the Corporation has an authorized and outstanding share capital
as set forth in the Registration Statement and the
Prospectuses. The Purchased Shares have been duly and validly
authorized and, when delivered by the Corporation in accordance
with this Agreement, will be duly and validly issued, fully
paid and non-assessable and will not have been issued in
violation of or subject to any preemptive rights. The Common
Shares, Firm Shares and Additional Shares conform to the
descriptions thereof contained in the Registration Statement
and the Prospectuses;
(iii) the Corporation has all requisite corporate power and authority
to own, lease, operate and license its assets and properties
and conduct its business as described in the Registration
Statement and the Prospectuses; there are no restrictions in
the articles and bylaws of the Corporation that would limit its
corporate power and authority to own, operate and license its
assets and properties and conduct its business as described in
the Registration Statement and the Prospectuses; and the
Corporation has all requisite corporate power and authority to
execute, deliver and perform its obligations under this
Agreement;
(iv) this Agreement and the transactions contemplated herein have
been duly authorized by all necessary corporate action and this
Agreement has been duly executed and delivered by the
Corporation;
(v) the execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the
Corporation do not and will not (A) conflict with or result in
a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or
both, would constitute a default) under, or result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Corporation or (B) violate or
conflict with any provision of, the constating documents of the
Corporation or any material agreement, indenture, lease or
other instrument to which the Corporation is a party or by
which it or any of its properties is bound that is known to
such counsel, which conflict, breach or default would have a
material adverse effect on the assets or properties, business,
results of operations, prospects or conditions (financial or
otherwise) of the Corporation and its Material Subsidiaries,
taken as a whole, or, to the
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<PAGE>
best knowledge of such counsel, any judgment, decree, order,
statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction
over the Corporation or any of its properties or assets; no
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having
jurisdiction over the Corporation or any of its properties or
assets is required for the execution, delivery and performance
of this Agreement or the consummation of the transactions
contemplated hereby, except for such as may be required under
Canadian Securities Laws or U.S. Securities Laws;
(vi) to the knowledge of such counsel, the Corporation is not (A) in
violation of its constating documents or (B) in default in the
performance of any material obligation, agreement or condition
contained in any bond, debenture, note or other evidence of
indebtedness, except as may be disclosed in the Prospectuses or
where any such default or defaults in the aggregate would not
have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition
(financial or otherwise) of the Corporation and the Material
Subsidiaries, taken as a whole;
(vii) to the knowledge of such counsel, except as disclosed in the
Prospectuses, there is no litigation or governmental or other
proceeding or investigation, before any court or before or by
any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the
Corporation or the Material Subsidiaries which would have a
material adverse effect upon the assets or properties,
business, results of operations, prospects or condition
(financial or otherwise) of the Corporation and the Material
Subsidiaries, taken as a whole;
(viii) the form and terms of the certificates representing the
Purchased Shares meet all legal requirements under applicable
laws of the jurisdiction of incorporation of the Corporation
and have been duly approved by the Corporation; and
(ix) as to all other legal matters reasonably requested by counsel
to the Underwriters relating to the distribution of the
Purchased Shares.
(c) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to counsel to the
Underwriters, acting reasonably, addressed to the Underwriters from
Bermuda counsel to the
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Corporation, ., as to the laws of Bermuda, which counsel in turn may
rely as to matters of fact, on certificates of the auditors of the
Corporation, public and stock exchange officials and officers of the
Corporation, with respect to the following matters:
(i) GPL has been duly incorporated and is validly subsisting under
the laws of its jurisdiction of incorporation. GPL is duly
qualified and in good standing as a foreign or extraprovincial
corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in
good standing which will not in the aggregate have a material
adverse effect on the Corporation or its Material Subsidiaries
taken as a whole;
(ii) all of the issued and outstanding capital stock of GPL has been
duly and validly issued and are fully paid and non-assessable
and was not issued in violation of preemptive rights and,
except as set forth in the Registration Statement and the
Prospectus, the Corporation is the registered owner of 100% of
the issued and outstanding capital stock of GPL;
(iii) GPL has all requisite corporate power and authority to own,
lease, operate and license its assets and properties and
conduct its business as described in the Registration Statement
and the Prospectuses; and there are no restrictions in the
articles and bylaws of GPL that would limit its corporate power
and authority to own, operate and license its assets and
properties and conduct its business as described in the
Registration Statement and the Prospectuses;
(iv) the execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the
Corporation do not and will not (A) conflict with or result in
a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or
both, would constitute a default) under, or result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of GPL or (B) violate or conflict with
any provision of, the constating documents of GPL or any
material agreement, indenture, lease or other instrument to
which GPL is a party or by which it or any of its properties is
bound that is known to such counsel, which conflict, breach or
default would have a material adverse effect on the assets or
properties, business, results of operations, prospects or
conditions (financial or otherwise) of the Corporation and its
Material Subsidiaries, taken as a whole, or,
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to the best knowledge of such counsel, any judgment, decree,
order, statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction
over GPL or any of its properties or assets; no consent,
approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having
jurisdiction over GPL or any of its properties or assets is
required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated
hereby, except for such as may be required under Canadian
Securities Laws or U.S. Securities Laws;
(v) to the knowledge of such counsel, GPL is not (A) in violation
of its constating documents or (B) in default in the
performance of any material obligation, agreement or condition
contained in any bond, debenture, note or other evidence of
indebtedness, except as may be disclosed in the Prospectuses or
where any such default or defaults in the aggregate would not
have a material adverse effect on the assets or properties,
business, results of operations, prospects or condition
(financial or otherwise) of the Corporation and the Material
Subsidiaries, taken as a whole;
(vi) to the knowledge of such counsel, except as disclosed in the
Prospectuses, there is no litigation or governmental or other
proceeding or investigation, before any court or before or by
any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the
Corporation or the Material Subsidiaries which would have a
material adverse effect upon the assets or properties,
business, results of operations, prospects or condition
(financial or otherwise) of the Corporation and the Material
Subsidiaries, taken as a whole; and
(vii) as to all other legal matters reasonably requested by counsel
to the Underwriters relating to the distribution of the
Purchased Shares.
(d) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to counsel to the
Underwriters, addressed to the Underwriters from Canadian counsel to
the Corporation, Aird & Berlis, as to the laws of Canada and the
Qualifying Provinces, which counsel in turn may rely upon the opinions
of local counsel where they deem such reliance proper as to the laws
other than those of Canada and Ontario and as to matters of fact, on
certificates of the auditors of the Corporation, public and stock
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exchange officials and officers of the Corporation, with respect to
the following matters:
(i) all necessary documents and proceedings have been filed and
taken and all other legal requirements have been fulfilled
under the laws of each of the Qualifying Provinces to qualify
the Purchased Shares to be offered and sold to the public in
each of the Qualifying Provinces by or through investment
dealers or brokers registered under applicable laws of such
provinces who have complied with the relevant provisions of
those laws, and no other authorization, approval, permit,
consent or license of any government, governmental
instrumentality or court in Canada is required for the valid
authorization, issuance, sale and delivery of the Purchased
Shares; to the knowledge of such counsel, no order having the
effect of ceasing or suspending the distribution of the
Purchased Shares has been issued by any Canadian Securities
Regulatory Authority or The Toronto Stock Exchange and no
proceedings for that purpose have been instituted or,
threatened by any Canadian Securities Regulatory Authority or
The Toronto Stock Exchange;
(ii) this Agreement constitutes a legal, valid and binding
obligation of the Corporation and is enforceable in accordance
with its terms, except as enforcement of this Agreement may be
limited by bankruptcy, insolvency, reorganization, moratorium
or similar laws affecting the rights of creditors generally and
except as limited by the application of equitable principles
when equitable remedies are sought; provided that such counsel
may express no opinion as to the enforceability of the
indemnity provisions of paragraph 10 and the contribution
provisions of paragraph 11 of the Agreement;
(iii) subject to the qualifications set out therein, the statements
made in the Prospectuses relating to Canadian income tax laws
under "Certain Income Tax Considerations" constitute a fair
summary of certain Canadian income tax considerations
applicable to those holders of Purchased Shares referred to
therein;
(iv) the form and terms of the certificates representing the
Purchased Shares meet all legal requirements under the rules of
The Toronto Stock Exchange;
(v) The Montreal Trust Company of Canada at its principal offices
in the Cities of Toronto and Vancouver have been duly appointed
as the transfer agent and registrar for the Common Shares;
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(vi) the Purchased Shares have been conditionally approved for
listing by The Toronto Stock Exchange on or before the Closing
Date;
(vii) under the laws of the Province of Ontario relating to
submission to jurisdiction, the Corporation has validly
submitted to the non-exclusive personal jurisdiction of the
courts of the Province of Ontario in any action arising out of
or relating to this Agreement and has validly appointed Aird &
Berlis in paragraph 16 of this Agreement for the purposes
described therein; and service of process effected in the
manner set forth in paragraph 16 of this Agreement will be
effective to confer valid personal jurisdiction over the
Corporation in any such action; and
(viii) as to all other legal matters reasonably requested by counsel
to the Underwriters relating to the distribution of the
Purchased Shares.
(e) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to counsel to the
Underwriters, addressed to the Underwriters from Mendelsohn
Rosentzveig Shacter, regarding compliance with the laws of Quebec
relating to the use of the French language in connection with the
documents (including any Preliminary Prospectus, the Prospectus,
Prospectus Amendments and certificates representing the Purchased
Shares) to be delivered to purchasers in Quebec.
(f) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to counsel to the
Underwriters, addressed to the Underwriters from United States counsel
to the Corporation, Wilson Sonsini Goodrich & Rosati as to the federal
laws of the United States and the laws of the State of California,
which counsel in turn may rely as to matters of fact, on certificates
of the auditors of the Corporation, public and stock exchange
officials and officers of the Corporation, to the following effect:
(i) SPI has been duly incorporated and is validly subsisting under
the laws of its jurisdiction of incorporation. SPI is duly
qualified and in good standing as a foreign or extraprovincial
corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the
nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in
good standing which will not in the aggregate have a material
adverse effect on SPI;
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<PAGE>
(ii) all of the issued and outstanding capital stock of SPI has been
duly and validly issued and is fully paid and non-assessable
and was not issued in violation of preemptive rights and,
except as set forth in the Registration Statement and the
Prospectuses, the Corporation is the registered owner of 100%
of the issued and outstanding capital stock of SPI;
(iii) SPI has all requisite corporate power and authority to own,
lease, operate and license its assets and properties and
conduct its business as described in the Registration Statement
and the Prospectuses; and there are no restrictions in the
articles and bylaws of SPI that would limit its corporate power
and authority to own, operate and license its assets and
properties and conduct its business as described in the
Registration Statement and the Prospectuses;
(iv) the execution, delivery, and performance of this Agreement and
the consummation of the transactions contemplated hereby by the
Corporation do not and will not (A) conflict with or result in
a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or
both, would constitute a default) under, or result in the
creation or imposition of any lien, charge or encumbrance upon
any property or assets of SPI or (B) violate or conflict with
any provision of, the constating documents of SPI or any
material agreement, indenture, lease or other instrument to
which SPI is a party or by which it or any of its properties is
bound that is known to such counsel, which conflict, breach or
default would have a material adverse effect on the assets or
properties, business, results of operations, prospects or
conditions (financial or otherwise) of the Corporation and its
Material Subsidiaries, taken as a whole, or, to the best
knowledge of such counsel, any judgment, decree, order,
statute, rule or regulation of any court or any public,
governmental or regulatory agency or body having jurisdiction
over SPI or any of its properties or assets; no consent,
approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having
jurisdiction over SPI or any of its properties or assets is
required for the execution, delivery and performance of this
Agreement or the consummation of the transactions contemplated
hereby, except for such as may be required under Canadian
Securities Laws or U.S. Securities Laws;
(v) to the knowledge of such counsel, SPI is not (A) in violation
of its constating documents or (B) in default in the
performance of any material obligation, agreement or condition
contained in any bond,
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<PAGE>
debenture, note or other evidence of indebtedness, except as
may be disclosed in the Prospectuses or where any such default
or defaults in the aggregate would not have a material adverse
effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of
the Corporation and the Material Subsidiaries, taken as a
whole;
(vi) to the knowledge of such counsel, except as disclosed in the
Prospectuses, there is no litigation or governmental or other
proceeding or investigation, before any court or before or by
any public body or board pending or threatened against, or
involving the assets, properties or businesses of, the
Corporation or the Material Subsidiaries which would have a
material adverse effect upon the assets or properties,
business, results of operations, prospects or condition
(financial or otherwise) of the Corporation and the Material
Subsidiaries, taken as a whole;
(vii) to the best of such counsel's knowledge, the Corporation meets
the eligibility requirements for the use of Form S-1 under the
1933 Act and the Rules and Regulations;
(viii) the Registration Statement has become effective under the 1933
Act; any required filing of the U.S. Supplemented Prospectus or
any supplement or amendment thereto containing the Rule 430A
Information pursuant to Rule 424(b) of the Rules and
Regulations has been made in the manner and within the time
period required by said Rule 424(b); and to the knowledge of
such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for
that purpose have been instituted or, to the best of such
counsel's knowledge, are threatened by the SEC;
(ix) the Registration Statement, as of its effective date, and the
U.S. Prospectus and each amendment or supplement thereto, and
each document incorporated by reference therein (other than the
financial statements and related notes and financial and
statistical data included or incorporated by reference therein,
as to which such counsel need not express any opinion) appear
on their face to be appropriately responsive in all material
respects with the requirements of the 1933 Act and the Rules
and Regulations applicable to registration statements on Form
S-1;
(x) no consent, approval, authorization, order, registration or
qualification of or with any court, regulatory body or
governmental agency or body is required on the part of the
Corporation under the federal laws of the
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United States for the sale of the Purchased Shares by the
Corporation or the execution and delivery of this Agreement by
the Corporation and the performance by the Corporation of its
obligations under this Agreement other than as have been
obtained under the 1933 Act (and other than actions as may be
required by the rules and regulations of the NASD or state
securities or Blue Sky laws, as to which such counsel need not
express any opinion), nor, so far as is known to such counsel,
will the issue and sale of the Purchased Shares to the
Underwriters and the execution and delivery of this Agreement
and the performance of its obligations thereunder contemplated
therein conflict with or result in a violation of any existing
federal law or regulation (assuming compliance with all
applicable state securities and Blue Sky laws), or, to such
counsel's knowledge, any ruling, or judgment, order or decree
of any government, governmental instrumentality or court
located in the United States having jurisdiction over the
Corporation or any of its property or assets;
(xi) to the knowledge of such counsel, there are no legal or
governmental proceedings pending or threatened against the
Corporation or any of the Material Subsidiaries or to which the
Corporation or any of the Material Subsidiaries or any of their
respective properties is subject, which are material to the
Corporation and the Material Subsidiaries taken as a whole,
that are required to be described in the Registration Statement
or the U.S. Prospectus that are not described as required;
(xii) the statements made in the U.S. Prospectus relating to United
States federal income tax laws and regulations under "Certain
Income Tax Considerations", to the extent that the foregoing
statements constitute matters of law or legal conclusions, have
been reviewed by such counsel and fairly present the
information disclosed therein in all material respects;
(xiii) the execution and delivery of this Agreement and the
performance by the Corporation of its obligations thereunder do
not and will not (A) conflict with or result in a breach of any
of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property
or assets of SPI or (B) violate any provision of, the
constating documents of the Corporation or SPI or any material
agreement included as an exhibit in the Registration Statement
or, to the best knowledge of such counsel, any judgment,
decree, order, statute, rule or regulation of any United States
federal or state court or public, governmental or regulatory
agency or body having jurisdiction over the Corporation or
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<PAGE>
any of its properties or assets; no consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction
over the Corporation or any of its properties or assets is
required for the execution and delivery of this Agreement or
the performance by the Corporation of its obligations
thereunder, except for such as may be required under Canadian
Securities Laws or U.S. Securities Laws;
(xiv) the Corporation is not and upon consummation of the
transactions contemplated hereby, will not be an "investment
company" as such term is defined in the United States
Investment Company Act of 1940, as amended;
(xv) in an action on a final and conclusive judgment in personam of
any court in the Province of Ontario that is not impeachable as
void or voidable under Ontario law, a court of competent
jurisdiction in the State of California would give effect to
the appointment by the Corporation of Aird & Berlis as its
agent to receive service of process in Canada under this
Agreement and to the provisions in this Agreement whereby the
Corporation submits to the non-exclusive jurisdiction of an
Ontario court;
(xvi) this choice of Ontario law as the law governing this Agreement
is a permissible choice of law under the laws of the State of
California and in an action properly brought before a
California state court or a Federal court sitting in the State
of California, Ontario substantive law would be applied in
determining the respective rights and obligations of the
parties thereto, provided that such court does not determine
that the application of such law would be repugnant to the
public policy of the State of California. Without having made
any special investigation, such counsel is not specifically
aware of any public policy of the State of California to which
the terms of this Agreement would be repugnant;
(xvii) under principals of international comity, a California State or
a Federal court sitting in the State of California should
recognize and enforce, against the immediate parties, a valid
judgment for the payment of money (other than a judgment for
taxes, a fine or other penalty) rendered by an Ontario court
that is conclusive and binding in Ontario (i.e., to the
----
same extent that such judgment would be recognized and enforced
by a court in Ontario), except that the enforcement thereof may
be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect
relating to creditors'
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<PAGE>
rights generally and to general principles of equity
(regardless of whether considered in a proceeding at law or in
equity). For purposes of this opinion, a judgment is valid only
if (A) under the laws of Ontario, the Ontario court has
jurisdiction over the parties in the case, (B) reasonable
notice and a reasonable opportunity to be heard was afforded to
the person affected, (C) there was compliance with the
requirements under Ontario law for the valid exercise of power
by the court, (D) the judgment was not procured by fraud, (E)
in the case of jurisdiction based only on personal service, the
Ontario court was not a seriously inconvenient forum for the
trial of the action, (F) such judgment rendered by the court
does not conflict with another final and conclusive judgment by
any other court, (G) the proceedings in the court rendering
such judgment were not contrary to any agreement between the
parties under which the dispute in question was to be settled
otherwise than by proceedings in that court, (H) such judgment
was rendered under a system which provides for impartial
tribunals and procedures compatible with the requirements of
due process of law under United States law, and (I) the
judgment and the cause of action underlying the judgment are
not repugnant to the public policy of the State of California.
In addition, United States counsel to the Corporation shall state
that such counsel has participated in conferences with officers and
other representatives of the Corporation, representatives of the
Underwriters and representatives of the independent auditors of the
Corporation, at which conference the contents of the Registration
Statement, the Canadian Prospectus and the U.S. Prospectus and related
matters were discussed and, although such counsel have not verified
and is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement and the Prospectus or the documents
incorporated by reference, if any, and shall include its statement of
belief that on the basis of the foregoing no facts have come to the
attention of such counsel which lead such counsel to believe that the
Registration Statement (except for financial statements and notes and
schedules intended therein and other financial and statistical data as
to which such counsel need not express any opinion), at the time it
became effective contained any untrue statement of material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto (except for
financial statements and notes and schedules included therein and
other financial and statistical data as to which such counsel need not
express any opinion), on the date of the Prospectus or on the Closing
Date or the Additional Closing Date, as the case may be, contained or
contains an untrue statement of a material fact or omitted or omits to
state a material fact
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<PAGE>
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(g) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, in form and substance satisfactory to the Underwriters,
addressed to the Underwriters from United States patent counsel to the
Corporation and the Material Subsidiaries, Morrison & Foerster LLP,
with respect to matters in connection with the preparation and filing
of certain patent applications for methods of treating and preventing
colon cancer using balsalazide, metabolites of balsalazide and
oxidation products of metabolites of balsalazide (such patent
applications and one United States patent issuing from one of such
patent applications is listed in Schedule I hereto) to the following
effect that:
(i) the statements in the Registration Statement and Prospectus (A)
in the fourth and ninth sentences of the first paragraph under
the caption "Risk Factors -- Patents and Proprietary Rights;
Expiration of Patents", and (B) in the first, second, third and
fourth sentences of the second paragraph under the caption
"Colazide" under the caption "Business --Patents and
Proprietary Rights" are, to their knowledge, accurate and
complete statements or summaries of the matters referred to
therein in all material respects;
(ii) to their knowledge, there are no judicial proceedings pending
relating to patent rights of the Corporation to which the
Corporation is a party, and, to their knowledge, no such
judicial proceedings are threatened by any person and to their
knowledge, the Corporation has not received any written notice
of infringement of or conflict with any patent rights of
others;
(iii) to their knowledge, each of the patent applications listed on
Schedule I hereto has been properly prepared and filed on
behalf of the Corporation;
(iv) assignment documents listing the Corporation as the sole
assignee of each of the United States patent applications
listed on Exhibit A hereto (the "Assigned Applications") have
been filed with the United States Patent and Trademark Office
(the "PTO"), and corresponding Notices of Recordation of
Assignment Documents have been received from the PTO and to
their knowledge, the Corporation has not received any written
communications in which it is alleged that the Corporation is
not the sole assignee of the Assigned Applications;
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<PAGE>
(v) to their knowledge, each of the patent applications listed on
Schedule I hereto is being prosecuted in a manner sufficient to
avoid abandonment of the application (other than abandonment in
favour of a continuing application); and
(vii) they believe that they have complied with their obligation to
disclose information material to patentability pursuant to 37
C.F.R. 1.56 in connection with the filing of the United States
patent application listed on Schedule I.
Such counsel shall additionally state that nothing has come to their
attention that leads them to believe that the statements in the Patent
Paragraphs concerning patents and patent applications for methods of
treating and preventing colon cancer using balsalazide, metabolites of
balsalazide and oxidation products of metabolites of balsalazide, at
the time the Registration Statement became effective, contained an
untrue statement of a material fact with respect to such patents and
patent applications or omitted to state a material fact with respect
to such patents and patent applications required to be stated therein
or necessary to make the statements therein not misleading or, as of
the date of the Prospectus or as of the date hereof, contained an
untrue statement of a material fact with respect to such patents and
patent applications or omitted to state a material fact with respect
to such patents and patent applications necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading.
(h) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or the Additional Closing Date, as the
case may be, addressed to the Underwriters from counsel to the
Underwriters, McCarthy Tetrault, with respect to certain of the
matters in subparagraph 9(b) and such other matters requested by the
Underwriters relating to the distribution of the Purchased Shares;
provided that counsel to the Underwriters shall be entitled to rely on
the opinions of local counsel as to matters governed by the laws of
jurisdictions other than the laws of Canada and Ontario, British
Columbia, Alberta and Quebec, and as to matters of fact, on
certificates of the auditors of the Corporation, public officials and
officers of the Corporation; and provided further that counsel to the
Underwriters shall be entitled to rely upon the opinion of counsel to
the Corporation, with respect to all matters addressed therein except
for subparagraph 8(b)(xiii) and (xiv).
(i) The Underwriters shall have received at the Closing Time a legal
opinion dated the Closing Date or Additional Closing Date, as the case
may be,
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<PAGE>
addressed to the Underwriters from U.S. counsel to the Underwriters,
Skadden, Arps, Slate, Meagher & Flom, LLP with respect to the
Registration Statement and the Prospectuses and such other related
matters as the Underwriters may request, and such counsel shall have
received such papers and information as they may request to enable
them to pass upon such matters. Skadden, Arps, Slate, Meagher & Flom,
LLP shall be entitled to rely upon the opinion of Aird & Berlis as to
matters of Canadian law in rendering their opinion.
(j) The Underwriters shall have received at the Closing Time a letter
dated the Closing Date or the Additional Closing Date, as the case may
be, in form and substance satisfactory to the Underwriters, addressed
to the Underwriters and the Chief Financial Officer and the directors
of the Corporation from the auditors of the Corporation, Ernst &
Young, LLP confirming the continued accuracy of the comfort letter to
be delivered to the Underwriters pursuant to subparagraph 4(k)(viii)
with such changes as may be necessary to bring the information in such
letter forward to a date not more than four Business Days prior to the
Closing Date or the Additional Closing Date, as the case may be, which
changes shall be acceptable to the Underwriters.
(k) The Underwriters shall have received at the Closing Time certificates
dated the Closing Date or the Additional Closing Date, as the case may
be, addressed to the Underwriters and counsel to the Underwriters and
signed by appropriate officers of the Corporation, with respect to the
articles and by-laws of the Corporation, all resolutions of the board
of directors of the Corporation relating to this Agreement, the
incumbency and specimen signatures of signing officers of the
Corporation and with respect to all other matters as the Underwriters
may reasonably request.
(l) At the Closing Date, the Purchased Shares shall have been approved for
listing on The Toronto Stock Exchange, subject to prior notice of
issuance.
(m) The Underwriters shall have received at the Closing Time a certificate
or certificates dated the Closing Date or the Additional Closing Date,
as the case may be, addressed to the Underwriters and signed on behalf
of the Corporation by the Chief Executive Officer and the Chief
Financial Officer of the Corporation or other officers of the
Corporation acceptable to the Underwriters, certifying for and on
behalf of the Corporation after having made due enquiry and after
having carefully examined the Prospectuses and any Prospectus
Amendments, that:
(i) since the respective dates as of which information is given in
the Prospectuses as amended by any Prospectus Amendment that
(A) there has been no material change (actual, anticipated,
contemplated or
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threatened, whether financial or otherwise) in the business,
affairs, operations, assets, liabilities (contingent or
otherwise) or capital of the Corporation and its Material
Subsidiaries, taken as a whole, and (B) no transaction has been
entered into by any of the Corporation and its Material
Subsidiaries which is material to the Corporation and its
Material Subsidiaries taken as a whole, other than as disclosed
in the Prospectuses or any Prospectus Amendment, as the case
may be;
(ii) no stop order suspending effectiveness of the Registration
Statement or any post-effective amendment thereof has been
issued and no proceedings therefor have been initiated or to
the knowledge of such officers, threatened by the SEC; no
order, ruling or determination having the effect of suspending
the sale or ceasing the trading of the Purchased Shares or any
other Purchased Shares of the Corporation has been issued by
any regulatory authority and is continuing in effect and no
proceedings for that purpose have been instituted or are
pending or, to the knowledge of such officers contemplated or
threatened under any Canadian Securities Laws, or by any other
regulatory authority;
(iii) the Corporation has complied in all material respects with the
terms and conditions of this Agreement on its part to be
complied with up to the Closing Time;
(iv) the representations and warranties of the Corporation contained
in this Agreement are true and correct in all material respects
as of the Closing Date or the Additional Closing Date, as the
case may be, with the same force and effect as if made at and
as of the Closing Time after giving effect to the transactions
contemplated by this Agreement; and
(v) such other matters as the Underwriters may reasonably request.
(n) The Underwriters shall have received at the Closing Time an executed
lock-up agreement from each of Biorex Laboratories Limited, Randy W.
Hamilton, Lorin K. Johnson, David E. Lauck and John F. Chappell
providing that such company or person will not sell, transfer or
assign, without the prior consent of Levesque, such consent not to be
unreasonably withheld, any Common Shares of the Corporation or any
securities convertible into or exercisable or exchangeable for Common
Shares, held or controlled, directly or indirectly by such company or
person, for a period of 90 days following the Closing Date.
(o) The Underwriters shall have received at the Closing Time such further
information, certificates and documents as the Underwriters may
reasonably request.
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9. RIGHTS OF TERMINATION
(a) LITIGATION
If any inquiry, action, suit, investigation or other proceeding (whether
formal or informal) is instituted or threatened or any order is made by any
federal, state, provincial, municipal or other governmental authority,
department, commission, board, bureau, agency or instrumentality in relation to
the Corporation or any of the Material Subsidiaries or the distribution of the
Purchased Shares should be announced, instituted or threatened or any order
under or pursuant to any laws or regulations of Canada or the Qualifying
Provinces or the United States or any state in which the distribution is being
made or by The Toronto Stock Exchange or any other regulatory or governmental
authority should be made or issued (except in each case for any such proceedings
or order based upon the activities or alleged activities of the Underwriters and
not of the Corporation), which, in the opinion of any of the Underwriters,
operates to or would prevent or restrict the distribution or trading of the
Purchased Shares or the investment quality or marketability of the Purchased
Shares, any one or more of the Underwriters shall be entitled, at its option and
in accordance with subparagraph 9(e), to terminate its obligations under this
Agreement by notice to that effect given to the Corporation at any time prior to
the Closing Time on the Closing Date.
(b) MARKET OUT CLAUSE
If prior to the Closing Time:
(i) there should develop, occur or come into effect or be announced
any occurrence of national or international consequence or any
action, governmental law, regulation or enquiry, or any other
occurrence of any nature whatsoever which, in the opinion of
any of the Underwriters, adversely affects or would be likely
to adversely affect the Canadian or U.S. financial markets or
the business of the Corporation and its Material Subsidiaries,
taken as a whole, or would be likely to prejudice the success
of the proposed issue, sale and distribution of the Purchased
Shares;
(ii) use of the Registration Statement or the Canadian Prospectus
shall have been suspended or trading in securities generally on
The Toronto Stock Exchange is suspended or materially limited;
(iii) a banking moratorium is declared by any federal, provincial or
state authority in either Canada or the United States; or
(iv) the state of the Canadian or international financial markets is
such that in the opinion of any of the Underwriters, the
Purchased Shares cannot be profitably marketed,
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the Underwriters shall be entitled at their option, in accordance with
subparagraph 9(e), to terminate their obligations under this Agreement by
written notice to that effect given to the Corporation prior to the Closing Time
on the Closing Date.
(c) MATERIAL CHANGE
If prior to the Closing Time, any event shall occur or condition shall
exist as contemplated by subparagraph 4(b)(iii) which is a change in a material
fact or a material change which results or, in the opinion of any of the
Underwriters, might be expected to result, in the purchasers of a material
number of Purchased Shares exercising their right under applicable legislation
to withdraw from their purchase of Purchased Shares or, in the opinion of any of
the Underwriters, might be expected to have a material adverse effect on the
market price or value or marketability of the Purchased Shares, any one or more
of the Underwriters shall be entitled, at its option, in accordance with
subparagraph 9(e), to terminate its obligations under this Agreement by written
notice to that effect given to the Corporation prior to the Closing Time.
(d) NON-COMPLIANCE WITH CONDITIONS
The Corporation agrees that all terms and conditions in paragraph 8 shall
be construed as conditions and complied with so far as they relate to acts to be
performed or caused to be performed by it, that it will use its reasonably
commercial efforts to cause such conditions to be complied with, and that any
breach or failure by the Corporation to comply with any such conditions shall
entitle any of the Underwriters to terminate its obligations to purchase the
Purchased Shares by notice to that effect given to the Corporation at or prior
to the Closing Time, unless otherwise expressly provided in this Agreement. The
Underwriters may waive, in whole or in part, or extend the time for compliance
with, any terms and conditions without prejudice to their rights in respect of
any other terms and conditions or any other or subsequent breach or non-
compliance, provided that any such waiver or extension shall be binding upon the
Underwriters only if such waiver or extension is in writing and signed by all of
the Underwriters.
(e) EXERCISE OF TERMINATION RIGHTS
The rights of termination contained in subparagraphs 9(a), (b), (c) and (d)
may be exercised by any of the Underwriters and are in addition to any other
rights or remedies any of the Underwriters may have in respect of any default,
act or failure to act or non-compliance by the Corporation in respect of any of
the matters contemplated by this Agreement or otherwise; provided, however, that
in no event may any Underwriter terminate its obligations hereunder as a result
of a breach of any covenant, representation or warranty by any Underwriter or as
a result of the failure of any Underwriter to satisfy any condition to be
satisfied by the Underwriters. In the event of any such termination, there
shall be no further liability on the part of the Underwriter to the Corporation
or on the part of the Corporation to the Underwriters except in respect of any
liability which may have arisen
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prior to or arise after such termination under paragraphs 10, 11 and 13. A
notice of termination given by an Underwriter under subparagraphs 9(a), (b), (c)
or (d) shall not be binding upon any other Underwriter.
10. (a) INDEMNITY
The Corporation agrees to indemnify and save harmless each of the
Underwriters and each of their directors, officers, employees and agents and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act or Section 20(a) of the 1934 Act from and against all
liabilities, claims, losses (other than loss of profits), costs, damages,
expenses (including but not limited to lawyers' fees and any and all expenses
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation) in any way caused by, or arising
directly or indirectly from, or in consequence of:
(i) any information or statement, except any statement relating
solely to the Underwriters, contained in the Registration
Statement, the Preliminary Prospectuses, the Prospectuses, the
Supplemented Prospectuses or any Prospectus Amendment or post-
effective amendment to the Registration Statement or in any
certificate of the Corporation delivered pursuant to this
Agreement which at the time and in the light of the
circumstances under which it was made contains or is alleged to
contain an untrue statement of a material fact;
(ii) any omission or alleged omission to state in the Registration
Statement, the Preliminary Prospectuses, the Prospectuses, and
Supplemented Prospectuses, any Prospectus Amendment or any
certificate of the Corporation delivered pursuant to this
Agreement, any fact, except any statement relating solely to
the Underwriters, whether material or not, required to be
stated in such document or necessary to make any statement in
such document, (i) in the case of the Registration Statement,
not misleading and (ii) in the case of any Preliminary
Prospectuses, the Prospectuses, the Supplemented Prospectuses
or any Prospectus Amendment, or post-effective amendment to the
Registration Statement not misleading in light of the
circumstances under which it was made;
(iii) any order made or enquiry, investigation or proceedings
commenced or threatened by any securities commission or other
competent authority based upon any untrue statement or omission
or alleged untrue statement or alleged omission or any
misrepresentation or alleged misrepresentation (except a
statement or omission or alleged statement or omission relating
solely to the Underwriters) in the
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Prospectuses or any Prospectus Amendment or based upon any
failure to comply with the Canadian Securities Laws (other than
any failure or alleged failure to comply by the Underwriters)
or U.S. Securities Laws, preventing or restricting the trading
in or the sale or distribution of the Purchased Shares in any
of the Qualifying Provinces or the United States; or
(iv) the non-compliance or alleged non-compliance by the Corporation
with any Canadian Securities Laws or U.S. Securities Laws
including the Corporation's non-compliance with any statutory
requirement to make any document available for inspection;
provided, however, that the Corporation will not be liable in any such case to
the extent but only to the extent that any such loss, liability, claim, damage
or expense arises out of or is based upon any statements contained in the
second, fourth, fifth, ninth or tenth paragraphs of the section of the
Prospectuses entitled "Plan of Distribution", the table included in the section
entitled "Underwriting" which identifies the underwriters and the allocation of
the Shares among them, or the information in the last paragraph of the outside
front cover page of the U.S. Prospectus and the last two paragraphs of the
outside front cover page of the Canadian Prospectus and provided that the
indemnification contained in this subparagraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter (or to
the benefit of any person controlling such Underwriter) on account of any such
loss, claim, damage, liability or expense arising from the sale of the Purchased
Shares by such Underwriter to any person if a copy of the U.S. Prospectus or the
Canadian Prospectus, as the case may be, shall not have been delivered or sent
to such person within the time required by the 1933 Act or Canadian Securities
Laws, and the untrue statement or alleged untrue statement or omission or
alleged omission of a material fact contained in such Preliminary Prospectus was
corrected in the U.S. Prospectus or the Canadian Prospectus, as the case may be,
provided that the Corporation has delivered the U.S. Prospectus or the Canadian
Prospectus, as the case may be, to the Underwriters in requisite quantity on a
timely basis to permit such delivery or sending. This indemnity agreement will
be in addition to any liability which the Corporation may otherwise have
including under this Agreement.
(b) NOTIFICATION OF CLAIMS
If any matter or thing contemplated by this paragraph (any such matter or
thing being referred to as a "Claim") is asserted against any person or company
in respect of which indemnification is or might be considered to be provided,
such person or company (the "Indemnified Part)"') will notify the Corporation,
as soon as reasonably practicable of the nature of such Claim (provided that any
failure to so notify shall relieve the Corporation of liability under this
paragraph to the extent only that such failure prejudices its ability to defend
or settle such claim) and the Corporation shall be entitled (but not required)
to assume the defence of any suit brought to enforce such Claim; provided,
however, that the defence shall be conducted through legal counsel acceptable to
the Indemnified Party, acting
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reasonably, that no settlement of any such Claim may be made by the Corporation
or the Indemnified Party without the prior written consent of the other parties,
acting reasonably, and the Corporation shall not be liable for any settlement of
any such Claim unless it has consented in writing to such Settlement.
(c) RETAINING COUNSEL
In any such Claim, the Indemnified Party shall have the right to retain
other counsel to act on his or its behalf, provided that the fees and
disbursements of such counsel shall be paid by the Indemnified Party unless (i)
the Corporation and the Indemnified Party shall have mutually agreed to the
retention of the other counsel; (ii) the Corporation shall not have employed
counsel to have charge of the defence of such action within a reasonable period
and time after notice of commencement of the action or (iii) the named parties
to any such Claim (including any added third or impleaded party) include both
the Indemnified Party and the Corporation and the Indemnified Party shall
reasonably conclude that representation of both parties by the same counsel
would be inappropriate due to the actual or potential differing interests
between them.
11. (a) CONTRIBUTION
In order to provide for a just and equitable contribution in circumstances
in which the indemnity provided in paragraph 10 would otherwise be available in
accordance with its terms but is, for any reason, held to be unavailable to or
unenforceable by the Underwriters or enforceable otherwise than in accordance
with its terms, the Corporation (the "Indemnifier") and the Underwriters shall
contribute to the aggregate of all claims, expenses, costs and liabilities and
all losses (other than loss of profits) of a nature contemplated by paragraph 10
in such proportions as is appropriate to reflect the relative benefits received
by the Corporation and the Underwriters from the offering of the Purchased
Shares or, if such allocation is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to above but also the relative fault of the Corporation and the Underwriters in
connection with the statements or omissions which resulted in such claims,
expenses, costs, liabilities or losses as well as any other relevant equitable
considerations. The relative benefits received by the Corporation and the
Underwriters shall be deemed to be in the same proportion as the total proceeds
from the offering (net of underwriting discounts and commissions but before
deducting expenses) received by the Corporation and the underwriting discounts
and commissions received by the Underwriters, respectively, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Corporation and of the Underwriters shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Corporation or the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters shall not in any event be
liable to contribute, in the aggregate, any amounts in excess of such aggregate
fee or any portion of such fee actually received. However, no party
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who has engaged in any fraud, fraudulent misrepresentation or negligence shall
be entitled to claim contribution from any person who has not engaged in such
fraud, fraudulent misrepresentation or negligence.
(b) RIGHT OF CONTRIBUTION IN ADDITION TO OTHER RIGHTS
The rights to contribution provided in this paragraph shall be in addition
to and not in derogation of any other right to contribution which the
Underwriters may have by statute or otherwise at law.
(c) CALCULATION OF CONTRIBUTION
In the event that an Indemnifier may be held to be entitled to contribution
from the Underwriters under the provisions of any statute or at law, the
Indemnifier shall be limited to contribution in an amount not exceeding the
lesser of:
(i) the portion of the full amount of the loss or liability giving
rise to such contribution for which the Underwriters are
responsible, as determined in subparagraph 11(a); and
(ii) the amount of the aggregate fee actually received by the
Underwriters from the Corporation under this Agreement.
(d) NOTICE
If the Underwriters have reason to believe that a claim for contribution
may arise, they shall give the Indemnifier notice of such claim in writing, as
soon as reasonably possible, but failure to notify the Indemnifier shall not
relieve the Indemnifier of any obligation which it may have to the Underwriters
under this paragraph.
(e) RIGHT OF CONTRIBUTION IN FAVOUR OF OTHERS
With respect to this paragraph, the Indemnifier acknowledges and agrees
that the Underwriters are contracting on their own behalf and as agents for
their directors, officers, employees and agents and each person, if any, who
controls an Underwriter within the meaning of section 15 of the 1933 Act or
subsection 20(a) of the 1934 Act.
12. SEVERABILITY
If any provision of this Agreement is determined to be void or
unenforceable in whole or in part, it shall be deemed not to affect or impair
the validity of any other provision of this Agreement and such void or
unenforceable provision shall be severable from this Agreement.
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13. EXPENSES
Whether or not the transactions contemplated by this Agreement shall be
completed, except as specifically provided below, all expenses of or incidental
to the creation, issue and delivery of the Purchased Shares and all expenses of
or incidental to all other matters in connection with the transaction set out in
this Agreement shall be borne by the Corporation directly including, without
limitation, all fees and expenses payable in connection with the qualification
of the Purchased Shares for distribution, the fees relating to listing the
Purchases Shares on any exchanges, fees and expenses relating to any roadshows,
including greensheets and other material used or distributed in connection with
such roadshows, all fees and expenses of the Corporation's legal counsel, up to
U.S. $15,000 of the fees and expenses of U.S. counsel to the Underwriters in
connection with any blue sky survey and any filing for review of the offering
with the NASD, all fees and expenses of the Corporation's auditors and any other
experts or advisers retained by the Corporation, all costs incurred in
connection with the preparation and printing of the Registration Statement, as
originally filed and all amendments thereof, and the preparation, translation,
printing and delivery of any Preliminary Prospectus, any Prospectus, any
Supplemented Prospectus, Prospectus Amendments and certificates representing the
Purchased Shares, all fees and expenses in connection with the listing of the
Common Shares on The Toronto Stock Exchange, and all filing fees of the SEC,
NASD and Canadian Securities Regulatory Authorities.
Except as otherwise provided herein, the fees and disbursements of the
Underwriters' counsel, the expenses of forming and managing banking and selling
groups and the Underwriters' "out-of-pocket" expenses shall be borne by the
Underwriters except that if this Agreement shall terminate or shall be
terminated pursuant to any provisions hereof or if this Agreement shall be
terminated by the Underwriters because of any failure or refusal on the part of
the Corporation to comply, in any material respect, with the terms or fulfill
any of the conditions of this Agreement other than pursuant to subparagraph 9(b)
of this Agreement or by reason of a default by the Underwriters, the Corporation
agrees to reimburse the Underwriters for all reasonable disbursements and
expenses (including fees and expenses of counsel for the Underwriters and the
expenses of forming and managing banking and selling groups) incurred by the
Underwriters in connection with this Agreement.
14. (a) OBLIGATION OF UNDERWRITERS TO PURCHASE
The Underwriters' obligations under this Agreement are several and not
joint. Accordingly:
(i) each of the Underwriters shall be obligated to purchase only
that number of Firm Shares set opposite its name below; and
(ii) if at the Closing Time any of the Underwriters fails or refuses
to purchase its applicable percentage of Firm Shares, the non-
defaulting Underwriters who are willing and able to purchase
their own
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applicable percentages of Firm Shares shall be relieved of
their obligations under this Agreement, provided that
notwithstanding the provisions of this subparagraph, the
Underwriters who are willing and able to purchase their own
applicable numbers of Firm Shares may, but shall not be
obligated to, purchase the total number of Firm Shares in such
proportion as may be agreed upon by the Underwriters who are so
willing and able.
Notwithstanding anything contained in this subparagraph, the Underwriters shall
not be entitled to purchase less than all the Firm Shares.
Subject to paragraph 2(c) of this Agreement, the applicable number of Firm
Shares which each of the Underwriters shall separately be obligated to purchase
is as follows:
Levesque Beaubien Geoffrion Inc. .
Yorkton Securities Inc. .
Marleau, Lemire Securities Inc. .
Midland Walwyn Capital Inc. .
Nothing contained in this subparagraph shall relieve from responsibility to the
Corporation under this Agreement an Underwriter who shall default in its
obligation to purchase its applicable percentage of the Firm Shares.
The provisions of this paragraph 14 shall apply mutatis mutandis to the
Additional Shares.
(b) RIGHT OF CORPORATION TO TERMINATE
Nothing in this paragraph or paragraph 9 shall oblige the Corporation to
sell to the Underwriters less than all of the Firm Shares.
(c) APPLICATION TO ADDITIONAL SHARES
The provisions of this paragraph 14 shall apply mutatis mutandis to the
Additional Shares.
15. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations, warranties, obligations and agreements of the
Corporation contained in this Agreement and in any certificate delivered
pursuant to this Agreement or in connection with the purchase and sale of the
Purchased Shares shall survive the purchase of the Purchased Shares and shall
continue in full force and effect for a period of two years unaffected by any
subsequent disposition of the Purchased Shares by the Underwriters or the
termination of the Underwriters' obligations (including termination pursuant to
paragraph 9)
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and shall not be limited or prejudiced by any investigation made by or on behalf
of the Underwriters in connection with the preparation of the Prospectuses, any
Prospectus Amendments or the distribution of the Purchased Shares. The
provisions of this paragraph shall not apply if the Underwriters do not purchase
any of the Purchased Shares. In such circumstances, there shall be no further
liability of the Corporation to the Underwriters under the terms of this
Agreement except in respect of any liability which may have arisen or which may
thereafter arise under paragraphs 10 and 11.
16. AGENT FOR SERVICE
By the execution and delivery of this Agreement, the Corporation (i)
acknowledges that it has, by separate written instrument, irrevocably designated
and appointed Aird & Berlis (or any successor) (together with any such
successor, the "Agent for Service"), as its authorized agent upon which process
may be served in any suit or proceeding arising out of or relating to this
Agreement or the Purchased Shares that may be instituted in any court in the
Province of Ontario or brought under Canadian Securities Laws, and acknowledges
that the Agent for Service has accepted such designation, (li) submits to the
non-exclusive jurisdiction of the courts of the Province of Ontario in any such
suit or proceeding, and, (iii) agrees that service of process upon the Agent for
and written notice of said service to the Corporation (mailed or delivered to
its Chief Financial Officer at its principal office in Palo Alto, California,
United States), shall be deemed in every respect effective service of process
upon the Corporation in any such suit or proceeding. The Corporation further
agrees to take any and all action, including the execution and filing of any and
all such documents and instruments, as may be necessary to continue such
designation and appointment of the Agent for Service in full force and effect
for six years from the date hereof.
17. TIME OF THE ESSENCE
Time shall be of the essence of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of Ontario and the laws of Canada applicable in Ontario.
19. FUNDS
All funds referred to in this Agreement shall be in Canadian dollars unless
otherwise noted.
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20. NOTICE
Unless otherwise expressly provided in this Agreement, any notice or other
communication to be given under this Agreement (a "notice") shall be in writing
addressed as follows:
If to the Corporation, addressed and sent to:
Salix Holdings, Ltd.
3600 W. Bayshore Rd., Suite 205
Palo Alto, California 94303
Attention: David Boyle
Fax: (650) 856-1555
cc. Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Douglas H. Collom
Fax: (650) 496-4086
Aird & Berlis
Barristers & Solicitors
BCE Place
Suite 1800, Box 754
181 Bay Street
Toronto, Ontario M5J 2T9
Attention: Jay A. Lefton
Fax: (416) 863-1515
If to Levesque, addressed and sent to:
Levesque Beaubien Geoffrion Inc.
1155 Metcalfe St.
Montreal, Quebec H3B 4S9
Attention: Jacques Lemay
Fax: (514) 879-5260
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If to Yorkton, addressed and sent to:
Yorkton Securities Inc.
BCE Place
181 Bay Street, Suite 3100
Toronto, Ontario M5J 2T3
Attention: Cathy R. Steiner
Fax: (416) 864-9134
If to Marleau, addressed and sent to:
Marleau, Lemire Securities Inc.
150 King Street West, Suite 2000
Toronto, Ontario M5H 1J9
Attention: William A. Tebbutt
Fax: (416) 595-0996
If to Midland, addressed and sent to:
Midland Walwyn Capital Inc.
BCE Place
181 Bay Street, Suite 400
Toronto, Ontario M5J 2V8
Attention: John D. Grant
Fax: (416) 369-8778
or to such other address as any of the parties may designate by notice given to
the others.
Each notice shall be personally delivered to the addressee or sent by fax
to the addressee and (i) a notice which is personally delivered shall, if
delivered on a Business Day, be deemed to be given and received on that day and,
in any other case, be deemed to be given and received on the first Business Day
following the day on which it is delivered; and a notice which is sent by fax
shall be deemed to be given and received on the first Business Day following the
day on which it is sent.
21. AUTHORITY OF LEVESQUE
All steps which must or may be taken by the Underwriters in connection with
the agreement resulting from the acceptance of this offer by the Corporation,
with the exception of any consent to a settlement pursuant to subparagraph 10(b)
(which consent shall be given by the Indemnified Party), a notice of termination
pursuant to paragraph 9 (which notice may
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be given by any of the Underwriters), or any waiver pursuant to subparagraph
9(d) (which waiver must be signed by all of the Underwriters), shall be taken by
Levesque on the Underwriters' behalf and the execution of this Agreement by the
Underwriters shall constitute the Underwriters' irrevocable delegation to
Levesque of such authority and the Corporation's authority for accepting
notification of any such steps from, and for delivering the certificates
representing the Firm Shares, and any Additional Shares to, or to the order of
Levesque.
22. COUNTERPARTS
This Agreement may be executed by any one or more of the parties to this
Agreement in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding and is agreed to
by you, please signify your acceptance by executing the enclosed copies of this
letter where indicated below and returning the same to Levesque. upon which this
letter as so accepted shall constitute an Agreement among us.
Yours very truly,
LEVESQUE BEAUBIEN GEOFFRION INC. YORKTON SECURITIES INC.
By: _____________________________ By: ______________________________
MARLEAU, LEMIRE SECURITIES INC. MIDLAND WALWYN CAPITAL INC.
By: _____________________________ By: ______________________________
The foregoing offer is accepted and agreed to as of the date first above
written.
SALIX HOLDINGS, LTD.
By: _____________________________
By: _____________________________
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EXHIBIT 4.1
NO. C00000 SHARES
SALIX Holdings, Ltd.
INCORPORATED UNDER THE LAWS OF THE BRITISH VIRGIN ISLANDS
_________________
CUSIP 794906 30 5
_________________
THIS CERTIFIES THAT
is the registered holder of fully paid
and non-assessable Shares of Common Stock without par value in the Capital of
SALIX HOLDINGS, LTD.
transferable only on the books of the Corporation by the holder hereof in person
or by attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar of the Corporation.
IN WITNESS WHEREOF the Corporation has caused this Certificate to be
signed by its duly authorized officers.
DATED Countersigned and Registered
MONTREAL TRUST COMPANY OF CANADA Toronto
Transfer Agent and registrar Vancouver
President /s/Randy W. Hamilton
Secretary /s/Jay A. Lefton By _____________________________________
Authorized Officer
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE AT THE PRINCIPAL
OFFICE OF MONTREAL TRUST COMPANY OF CANADA IN TORONTO AND VANCOUVER
<PAGE>
For Value Received, __________________ hereby sells, assigns, and transfers unto
___________________________________________________
___________________________________________________
PLEASE INSERT SOCIAL INSURANCE NUMBER OF TRANSFEREE
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF TRANSFEREE
________________________________________________________________________________
________________________________________________________________________________
_____________ Shares of the Capital stock represented by the within Certificate,
and do hereby irrevocably constitute and
appoint _________________ Attorney, to transfer the said stock on the Books of
the within named Corporation, with full power of substitution in the premises.
Dated _________________, 19__
_______________________________
In presence of
_____________________________
Dated _________________, 19__
_______________________________
In presence of
_____________________________
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Selected
Consolidated Financial Data" and "Experts" and to the use of our report dated
March 18, 1997, in Amendment No. 1 to the Registration Statement on Form S-1
and related Prospectus of Salix Holdings, Ltd. for the registration of
3,450,000 shares of its common stock.
/S/ ERNST & YOUNG LLP
Palo Alto, California
September 24, 1997
